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CHAPTERS 


.THEORY  AND  HISTORY 


OF  BANKING. 


BY 

CHARLES   F.  DUNBAR 

PROFESSOR   OF   POLITICAL  ECONOMY   IN  HARVARD   UNIVERSITY 


G.   P.    PUTNAM'S   SONS 

NEW   YORK  LONDON 

CJ   WEST  TWENTY-THIRD    ST.        27  KING   WILLIAM    ST.,   STRAND 

1891 


"    •      -     ... .. 


«T» 


COPYRIGHT,  189X 
BY 

CHARLES  F.  DUNBAR 


Ube  ftnicfcctbocftcr  presa,  'Wew  lih>rli 

Electrotyped,  Printed,  and  Bound  by 
G.  P.  Putnam's  Son* 


PREFACE 


The  preparation  of  the  following  chapters  is  the 
result  of  the  need  of  some  convenient  statement  of 
ordinary  banking  operations,  felt  by  the  writer  when 
lecturing  upon  banking  to  a  large  class  of  students  in 
the  elements  of  political  economy.  To  the  chapters 
devoted  to  such  operations  it  was  found  useful  to  add 
a  series  of  historical  chapters  on  certain  of  the  great 
banks  and  banking  systems,  partly  for  the  easy  illus- 
tration of  theory  and  partly  to  supply  the  want  of 
any  good  manual  of  banking  history. 

Eight  of  the  chapters  were  printed  in  1885  for  the 
use  of  classes  in  Harvard  University,  but  were  not 
then  given  to  the  public.  To  these  have  now  been 
added  an  introductory  chapter,  a  chapter  on  com- 
bined reserves  or  the  system  of  Clearing-House  loan 
certificates,  and  one  on  the  Bank  of  Amsterdam. 
The  whole  has  been  revised  and  the  notices  of  cur- 
rent history  brought  down  to  the  present  date,  and 
the  book  is  now  laid  before  students  and  readers 
with  the  hope  that  it  may  aid  in  the  systematic 
study  of  a  subject,  the  treatment  of  which  by  writers 


iv  PREFACE. 

upon  economics  is  generally  either  too  summary  or 
too  diffuse  for  ordinary  purposes. 

The  writer  has  annotated  his  text  with  a  freedom 
which  perhaps  demands  some  apology,  desiring  to 
make  his  notes  answer  the  double  purpose,  of  inform- 
ing the  reader  as  to  the  sources  from  which  state- 
ments are  drawn,  and  of  inviting  him  to  explore  the 
sources  more  deeply  than  was  possible  within  the 
limits  of  the  present  publication. 


CONTENTS. 


CHAPTER  I.  ^ 

PAGE 

INTRODUCTORY  I 


CHAPTER  II. 
DISCOUNT,  DEPOSIT,  AND  ISSUE  .  «#«^         .  .  9 


CHAPTER   III.^ 


BANKING  OPERATIONS  AND  ACCOUNTS       ^  .  .  20 

CHAPTER  IV. ^ 
THE  CHECK  SYSTEM  ,  ,  \  ,.-— "C^ r        39 

CHAPTER  V. 
BANK-NOTES *  .         54 

CHAPTER    VI. 
COMBINED   RESERVES  ......         67 

V 


vi  CONTENTS. 

PAGE 

CHAPTER  VII.  " 
THE  BANK  OF  AMSTERDAM 82 


CHAPTER  VIII. 
THE  BANK  OF  FRANCE I06 

CHAPTER  IX.   ^ 
THE  NATIONAL  BANKS  OF  THE  UNITED  STATES  .       I32 

CHAPTER  X. 
THE  BANK  OF  ENGLAND 154 

CHAPTER    XI. 
THE  REICHSBANK  OF   GERMANY  ....       187 


CHAPTERS  ON  BANKING. 


CHAPTER  I. 

INTRODUCTORY. 

The  operations  of  banking,  as  the  system  has 
been  developed  in  the  last  two  centuries,  appear  at 
first  sight  to  be  singularly  complex  and  difficult  of 
comprehension.  This  is  not  due,  however,  to  any 
mystery  in  the  operations  themselves,  but  simplicity 
is  the  result  of  their  multiplicity  and  of  of  banking 
the  varied  conditions  under  which  they  °^^^^  ^°"^' 
take  place.  The  wants  which  banks  satisfy  are  of  a 
simple  kind,  sure  to  arise  early  in  the  history  of  any 
commercial  or  industrial  community  in  which  there 
is  mutual  confidence  among  men ;  and  the  satisfaction 
of  these  wants  is  a  business  easily  established  in  what 
might  well  be  regarded  as  an  almost  primitive  con- 
dition of  trade.  The  transactions  by  which  these 
wants  are  satisfied  are,  moreover,  as  simple  as  the 
wants  themselves,  and  are  speedily  reduced  to  such 
routine  as  to  lead  Adam  Smith,  in  a  well-known 
passage,  to  rate  "  the  banking  trade  "  as  one  of  the 
few  which,  in  his  judgment,  could  be  brought  to 


2  CHAPTERS   ON- BANKING. 

•'«  • ';' '/ fV'::    :  •  -     • 
such  uniformity  of  method  as  to  be  safely  conducted 
by  a  joint-stock  company. 

The  leading  wants  to  be  provided  for  by  banks 
//are,  first,  loans  upon  a  considerable  scale,  requixgd 
by  individuals  embarking  in  enterprises  beyond  their 
^  own  means  j  and,  second,  the  temporary  ernployment 
of  _money  wh|ch  is  not  required  by  the  owner  for 
inimediate  use,  or_at  leas^thg^means  of  safely  keep- 
ing it.  Some  agency  for  lending  and  some  place 
of  deposit  are  called  for  as  soon  as  commerce  begins 
to  move  in  a  regular  course.  With  these  may  be 
required  some  system  for  simplifying  the  currency 
of  the  community,  or  for  giving  it  an  ascertained 
value,  but  this  is  after  all  a  secondary  matter.  The 
primary  and  indispensable  functions  to  be  provided 
for  are  those  of  lending  and  of  receiving  on  deposit, 
and  it  is  these  which  have  given  rise  to  modern 
banking. 

These  functions,  it  is  clear,  imply  no  very  complex 
operations.  They  require  prudence^  integrity,  and 
patience,  but  they, have  no  mystery.  The  banker 
whq71inds,_-or  who  engages jLQ^_supply  cash  to  hTs 
customer  as  it  may  be  called  for,  .needs  to  be  sure,  of 
the  solvency  of  his  borrower  and  of  the  goodness  of 
'  the  security  received,  and  must  have  the  evidence 
of  the  transaction  made  indubitable,  its  terms  clearly 
fixed,  and  the  record  of  it  complete  and  exact. 
When  he  receives  cash  on  deposit,  or  collects  for 
others  cash  which  is  due  and  holds  it  until  it  is 
wanted  by  the  owners,  he  must  in  like  manner  be 
sure  that  the  evidence  of  every  transaction  is  regular 
and   placed  beyond  doubt,  and  that  its  record  is 


INTRODUCTORY.  3 

precise  and  systematic.  And  when,  as  an  extension 
of  his  system  of  holding  deposits,  he  recognizes  the 
right  of  a  depositor  to  transfer  his  deposit  or  any 
part  of  it  to  another  person,  and  thus  to  make  a 
payment  to  the  latter,  the.  operation  of  transfer 
must  be  closely  followed  and  the  resulting  changes 
in  the  banker's  accounts  must  be  made  with  fidelity 
and  minute  accuracy.  But  in  no  one  of  these  cases 
does  the  actual  transaction  present  any  more  diffi- 
culty of  comprehension  than  the  simple  payment  or 
receipt  of  money.  •  The  questions  of  prudence, — how'i  h 
much  and  to  whom  it  is  advisable  to  lend,  and  upon 
what  terms,  how  far  it  is  safe  to  assume  that  deposits  r 
will  be  left  undisturbed,  and  to  what  extent  it  is  I 
needful  to  be  prepared  for  demands  by  depositors, —  i 
require  all  the  light  that  trained  sagacity  and  experi-^ 
ence  can  throw  upon  them,  as  do  the  questions 
relating  to  the  conduct  of  business  in  many  depart- 
ments ;  but  the  essence  of  the  transactions  themselves, 
to  which  the  judgment  of  the  banker  is  applied,  is 
simple. 

As  a  natural  consequence  of  the  simplicity  of  the 
operations   involved    in    lending   and    in   receiving 
deposits,  it  is  probable  that  they  have  been  under- 
taken  and  carried  on  in  every  old  country  by  indi- 
viduals  long   in   advance    of   any    public  Banking  first 
establishments,  and  long  before  the  chroni-  carried  on  by 
clers  of  history  thought  it  worth  while  to 
notice  phenomena  of  such  a  humble  order.     Private  ^ 
lenders  established  banking  in  Venice  two  centuries?^ 
before  the  Senate  opened  its  first  public  bank  ol 
deposit.     Banking  was  in  like  manner  practised  by 


4  CHAPTERS  ON  BANKING. 

individuals  in  Amsterdam  long  before  a  special  class 
of  evils  led  the  city  to  establish  the  famous  Bank  of 
Amsterdam.  And  banking  of  a  well-defined  modern 
type  was  introduced  by  the  London  goldsmiths  at 
least  a  generation  before  the  opening  of  the  Bank  of 
England.  Instances  of  the  same  sort  could  easuy 
be  multiplied,  tending  to  show  that  in  other  coun- 
tries also  banking  has  had  its  origin  in  the  effort  of 
individuals  to  supply  certain  rather  primitive  wants 
of  an  advancing  community,  and  that  the  process  of 
satisfaction  was  by  means  of  a  few  thoroughly  simple 
operations.  And  such  as  the  operations  of  banking 
were  two  or  three  centuries  ago,  they  have  continued 
to  be  in  the  midst  of  the  changes  and  the  enormous 
development  of  the  present  century. 

It  is  probable,  however,  that  in  most  modern  com- 
munities the  individual  wants  which  banking  under- 
takes to  supply  have  ceased  to  be  the  exclusive 
object  of  attention,  and  that  the  general  influence  and 
ulterior  effects  of  a  banking  system,  not  originally 
foreseen  and  long  a  matter  of  dispute,  have  taken 
the  leading  place  among  the  reasons  for  introducing 
such  a  system.  The  first  bankers  probably  had  little 
thought  of  affording  encouragement  or  applying  a 
stimulus  to  the  industry  of  the  community  as  a 
Ulterior  wholc.  When  they  began,  however,  to 
effects  of  lend  their  money  systematically  to  mer- 
chants or  the  producers  of  goods,  they 
began  to  give  the  command  of  capital  in  the  enter- 
prises where,  for  the  time  being,  it  was  most  called 
for  and  presumably  most  needed.  When  they  in- 
creased their  loans  of  this  sort,  by  means  of   the 


INTRODUCTORY.  5 

funds  left  temporarily  in  their  care  by  persons 
depositing  with  them,  they  began  to  ^ive  ta_in=^ 
dustry  the  benefit  of  capitaTwhicli. would  otherwise- 
have  remained  idle,  or  to  secure  the  more  speedy 
application  of  capital  slowly  seeking  employment. 
The  use  of  their  own  notes  as  the  medium  for 
making  their  loans,  in  a  manner  strictly  analogous, 
gave  to  their  borrowers  the  command  of  capital 
which  the  fluctuating  body  of  noteholders  might 
forbear  to  demand.  And  their  practice  of  discount- 
ing  the  biUs^received  by  dealers  frqm_ their  customers 
tended  jto  a  rapid  organization  of  credit,  and,  by 
giving  the  dealer  the  immediate  use  of  that  which 
was  due  to  him  at  some  time  in  the  future,  shortened 
the  period  required  for  ^^  turning  his  money'*  and 
undertaking  some  fresh  enterprise.  It  is  obvious 
that  the  bankers  created  no  new  capital  by  their 
lending  and  deposit-holding,  but  it  is  equally  plain 
that  they  directed  the  streams  of  capital  to  the' 
enterprises  and  industries  requiring  such  support, 
and  that  they  quickened  the  succession  of  commer- 
cial and  industrial  operations.  A  given  amount  of 
capital  was  thus  made  more  effective,  so  that  the 
result  of  the  introduction  of  banking  in  any  com- 
munity was  the  equivalent  of  a  considerable  increase 
of  capital,  although  not  implying  any  real  increase  in 
the  first  instance. 

The  stimulus  thus  appHed  by  banking  to  the 
general  commercial  and  industrial  movement  of  any 
community,  whether  young  or  old,  has  long  been 
clearly  seen  ;  and  it  is  this  effect  of  operations,  at 
first  undertaken  simply  with    reference  to  the  de- 


6  CHAPTERS   ON   BANKING. 

mands  of  individual  convenience,  that  now  chiefly 
claims  attention  and  excites  interest.  This  stimulus 
stimulated  ^^  ^^^  Unattended  by  risk.  Deposit-holding 
credit  has  its  and  the  increase  of  notes  are  alike  opera- 
angers.  ^jq^s  of  Credit.  They  imply,  as  conditions 
of  their  existence,  a  certain  growth  of  mutual  confi- 
dence in  any  community,  and  a  certain  degree  of 
domestic  peace ;  and  under  conditions  otherwise 
similar,  nations  will  differ  in  their  resort  to  such 
operations,  as  the  national  temperament  is  more 
/  or  less  sanguine  and  as  tradition  and  habit  have 
prepared  the  way,  or  the  reverse.  But  to  whatever 
extent  credit  is  thus  used,  it  introduces  not  only  the 
dangers  of  misplaced  confidence,  but  the  greater 
/  danger  coming  from  the  spirit  of  adventure.'^  The 
tendency  under  the  keen  spur  of  a  developed  bank- 
ing system  to  carry  enterprises  based  upon  credit 
beyond  the  point  of  safety,  the  infection  of  an  entire 
community  by  the  fever  of  speculation,  are  too 
familiar  for  comment,  and  the  errors  of  bankers  in 
aiding  and  encouraging  that  which  they  should  have 
striven  to  repress  or  control,  have  at  times  brought 
the  utility  of  banking  itself  into  question. 

The  modern  world,  however,  does  not  forego  the 
use  of  any  great  agency  because  it  is  attended  by 
danger.  To  secure  a  balance  of  gain  by  minimizing 
the  risks,  always  recognizing  their  existence  and  their 
deplorable  character,  has  been  the  aim  of  most  com- 
mercial communities  in  dealing  with  banking  during 
at  least  four  generations.  The  ignorant  hostility  to 
the  system  itself  instead  of  its  abuses,  which  only 
thirty  years  ago    appeared    in    the  constitutions  of 


INTRODUCTORY.  / 

several  of  the  United  States,  has  now  given  way  to 
a  wiser  appreciation  of  the  great  services  rendered 
by  banks  and  bankers  in  the  development  of  a 
country    like    this. 

The  difficulty  of  properly  weighing  the  advantages 
and  the  risks  of  banking  has  been  greatly  increased 
by  the  reckless  imprudence  with  which  j^ence  notes 
banks  have  so  often  managed  their  issues  often  viewed 
of  notes,  to  which  allusion  has  already  ^^  ^"^^^  ^' 
been  "made.  Such  issues,  although  not  a  necessary 
adjunct  of  the  business  of  lending  and  of  deposit-  ^ 
holding,  are  a  natural  and,  in  some  conditions  of 
society,  a  usual  adjunct.  Where  they  are  made,  the 
issuing  banks  or  bankers  at  once  become  responsible 
for  an  important  part  of  the  visible  circulating  me- 
dium of  the  country.  Their  mistakes  or  wrong- 
doing may  affect  a  multitude  of  persons  having  no 
intentional  or  conscious  share  in  or  relation  to  the 
concerns  of  any  bank ;  and  may  easily  throw  the 
affairs  of  a  community  into  confusion.  It  is  true,  as 
we  shall  see  hereafter,  that  the  steps  by  which  a 
bank  issues  its  notes  do  not  differ  from  those  by 
which  it  assumes  other  less  observed  liabilities,  and 
that  its  obligations  in  the  two  cases  are  the  same  m 
essence.  Still,  the  wide  diffusion  of  an  issue  of  notes 
and  the  more  visible  and  notorious  nature  of  the 
evils  resulting  from  its  mismanagement  make  such 
issues  the  object  of  extreme  jealousy,  and  have  often 
led  to  the  indiscriminate  condemnation  of  all  banks. 
Although,  .therefore,  the  issue  of  notes  is  not  one  of 
what  we  have  called  '^  the  primary  and  indispensable  < 
functions  *'  of  banking,  it  is  a  function  which  fills  a    * 


8  CHAPTERS   ON   BANKING. 

large  space  in  most  discussions  of  banking  theory,  as 
well  as  in  the  history  of  the  great  banking  systems 
and  in  legislation. 

The  starting-point  in  the  present  exposition  of 
the  subject  then  must  be  an  examination  of  the 
transactions  involved  in  lending,  deposit-holding,  and 
note  issue  or  circulation. 


CHAPTER   II. 

DISCOUNT,   DEPOSIT,    AND   ISSUE. 

A  BANK  may  be  described,  in  general  terrns,  as 
an  establishment  which  makes  to  individuals  such 
advances  of  money  or  other  means  of  payment  as 
may  be  required  and  safely  made,  and  to  which  in- 
dividuals entrust  money  or  the  means  of  payment, 
when  not  required  by  them  for  use.  In  other  words,  ^ 
the  business  of  a  bank  is  said  to  be  to_lend  ^j^^  ^^^^^ 
or  discount,  and  to  hpjd  deposits.  With  banking 
these  two  functions  is  often  combined  a 
third,  that  of  issuing  bank-notes,  or  the  bank's  own 
promises  to  pay,  for  use  in  general  circulation  as  a 
substitute  for  money. 

The  object  of  the  present  chapter  is  to  inquire  into 
the  real  nature  of  the  operations,  thus  roughly  clas- 
sified and  usually  described  by  the  terms  Discount(Ji 
Deposit,  and  Issue;  and  for  this  purpose  we  shall 
analyze  the  transactions  attending  the  ordinary  and 
simple  case  of  a  loan  made  by  a  bank  to  one  of  its 
customers. 

The  borrower  who  procures  a  loan  from  a  bank 
does  so  in  order  to  provide  himself  with  the  means, 
either  of  making  some  purchase,  or  of  paying  some 
debt.     He  seeks,  therefore,  to  obtain,  not  necessarily 


lO  CHAPTERS   ON   BANKING. 

money,  but  a  certain  amount  of  purchasing  power  in 
available  form,  or  of  whatever  may  be  the  usual 
medium  of  payment,  measured  in  terms  of  money. 
If  we  suppose  him  to  be  a  merchant,  buying  and 
Discount  -  selling  goods  upon  credit  in  the  regular 
analyzed,  course  of  his  busincss,  he  is  likely  at  any 
given  time  to  have  in  his  hands  a  greater  or  less  num- 
ber of  notes,  not  yet  due,  signed  by  the  purchasers  to 
whom  he  has  heretofore  made  sales ;  and  it  is  in  the 
form  of  a  loan,  made  upon  the  security  of  one  or 
more  of  these  notes  and  giving  him  immediate  com- 
mand of  the  amount  which  will  become  due  upon 
them  in  the  future,  that  he  is  likely  to  procure  what 
he  needs  from  the  bank.  This  loan  may  be  sup- 
posed to  take  the  form  of  what  is  termed  a  discount ; 
in  which  case,  in  exchange  for  the  note  ^^  discounted  " 
the  borrower  is  entitled  to  receive  from  the  bank  the 
amount  promised  in  the  note,  less  the  interest  on 
that  amount  computed  at  an  agreed  rate  for  the 
time  whicli  the  note  has  still  to  run.*  The  dis- 
counted note  becomes  the  property  of  the  bank,  to 
which  the  promisor  is  henceforward  bound  to  make 

*  If,  e.  g.y  the  note  discounted  promises  to  pay  $2,500,  has  87 
days  to  run,  and  the  agreed  rate  is  6  per  cent.,  then  the  interest  to  be 
deducted  is  $36.25,  and  the  proceeds  received  by  the  borrower  are 
$2,463.75.  This  process,  which  is  commonly  used  and  is  known  as 
"bank  discount,"  gives  a  result  somewhat  different  from  that  of  dis- 
count in  the  strict  sense  of  the  term.  Strictly  speaking,  discount 
consists  in  finding  that  sum  which,  if  put  at  interest  for  87  days  at  6 
per  cent.,  will  then  amount  to  $2,500,  or,  in  other  words,  in  finding 
the  present  worth  of  $2,500  due  under  the  conditions  stated.  As  this 
present  worth  is  $2,464.27,  the  established  practice  gives  to  the  bank 
a  slight  profit  in  addition  to  that  afforded  by  true  discount.  See  on 
this  point  Agricultural  Bank  vs.  Eisseli,  12  Pick.  585. 


DISCOUNT,    DEPOSIT,   AND    ISSUE.  II 

payment  at  maturity  ;  and  this  payment  when  made 
obviously  restores  to  the  bank  the  amount  advanced 
by  it  in  exchange  for  the  note,  together  with  the 
interest  which  was  the  inducement  for  making  the 
exchange. 

It  is  now  clear,  however,  that  the  operation  which 
we  have  described,  although  spoken  of  as  a  loan  by 
the  bank  to  a  borrower,  is  in  fact  something  more 
than  a  loan.  The  note  when  given  was  evidence  that 
its  holder  owned  the  right  to  receive  at  a  fixed  date 
a  certain  sum  of  money,  and  this  right  the  so-called 
borrower  has  ceded  to  the  bank.  Passing  j^  .^  essence 
over  for  the  present  all  question  as  to  what        a  sale  to 

,        ,  ...  ,  1   .  .  c  the  bank. 

he  has  received  in  exchange,  his  cession  ot 
property  by  sale  is  as  distinct  and  complete  as  if  he 
had  sold  a  bale  of  cotton  to  another  merchant,  in- 
stead, of  selling  to  a  bank  his  right  to  receive  money 
in  the  future.  It  is  true  that  in  parting  with  the 
note  he  probably  endorsed  it,  and  thus  bound  him- 
self to  make  good  its  amount  in  case  the  promisor 
should  fail  to  do  so  ;  but  he  might  equally  bind  him- 
self by  some  warranty  given  to  the  purchaser,  when 
selling  any  other  description  of  property.  The  note 
has  ceased  to  be  his,  and  now  takes  its  place  among 
the  investments  or  securities  of  the  bank,  although 
custom  may  lead  to  its  classification  as  a  "  loan  or 
discount."  * 

The  operation  which  we  have  here  presented  in  its 
simplest  form  may  easily  change  its  shape  according 

»  In  an  account  of  the  Bank  of  England,  the  note  supposed,  if 
taken,  would  have  to  be  classified  under  "  other  securities,"  together 
with  bonds  or  stocks  owned  by  the  Bank.     See  post,  chapter  x. 


12  CHAPTERS   ON   BANKING. 

to  circumstances.  Thus,  instead  of  offering  for  '^  dis- 
count "  the  notes  of  his  customers,  our  merchant  may 
offer  his  own  note  for  the  sum  which  he  wishes  to 
obtain,  and  attach  to  it,  as  security  for  its  payment 
at  maturity,  one  or  more  of  the  notes  of  his  custom- 
ers. In  this  case  the  principal  note,  his  own,  be- 
comes the  property  of  the  bank,  the  right  to  receive 
from  him  at  its  maturity  the  sum  promised  in  it 
being  the  real  object  of  sale  ;  and  the  attached  notes, 
originally  received  by  him  for  merchandise  and  now 
pledged  to  the  bank  as  collateral  security  for  the 
performance  of  his  contract,  continue  to  be  his  prop- 
erty, subject  to  the  right  of  the  bank  to  be  indemni- 

J^  fied  therefrom  in  case  of  his  failure.  So,  too,  he  may 
offer  his  own  note,  securing  it  by  the  pledge  of 
bonds,  stocks,  or  other  valuable  property,  the  owner- 
ship of  which  he  does  not  part  with,  while  at  the 
same  time  he  sells  as  effectually  as  in  the  first  case 
the  right  to  receive  from  him  a  certain  sum  at  a  fixed 

5  date.  Or,  instead  of  the  note  of  hand  which  we  have 
supposed  to  be  used,  some  other  kind  of  negotiable 
*/paper,  as,  for  example,  the  bill  of  exchange,  may  be 
preferred  by  local  usage  as  the  evidence  of  commer- 
cial obligation.  Still,  whatever  the  form  of  the  trans- 
action by  which  a  bank  may  make  ^'  advances "  or 
^^  loans,"  it  will  be  found  that  in  every  case  a  right  to 
demand  and  receive  a  certain  sum  of.  money  has 
been  acquired  by  the  bank  for  a  consideration,  and 
that  the  transaction  was,  therefore,  in  essence  an 
exchange  of  rights. 

We  now  have  to  consider  what  it  is  that  the  bank 
gives  in   exchange   for  -the    right    to    demand    and 


DISCOUNT,    DEPOSIT,   AND    ISSUE.  1 3 

receive  money  at  a  future  time,  acquired  by  it  under 
these  circumstances.  To  return  to  our  first  and 
simplest  case  of  so-called  discount ;  the  proceeds  of 
the  discounted  note,  or  its  nominal  amount  less  the 
interest  for  the  time  for  whicl^  it  is  to  tup,  are  in  the 
first  instance  placed  to  the  credit  of  the  merchant,  to 
be  drawn  out  by  him  at  once  or  at  different  times,  as 
convenience  or  necessity  may  dictate.  In  j^^  ^^^^ 
thus  crediting  him  with  the  proceeds,  the  arising  from 
bank  plainly  gives  to  him  simply  the  right  ^scoun  , 

to  call  upon  it  at  pleasure  for  that  sum  of  money. 
Whether  this  right  is  exercised  at  once  by  demand- 
ing and  receiving  the  money,  or  whether  the  exercise 
of  it  is  postponed  as  regards  the  whole  or  a  part  of 
the  amount,  in  either  case  the  right  to  demand,  or  to 
"draw,"  is  the  equivalent  received  by  the  merchant 
in  exchange  for  the  right  sold  by  him  to  the  bank,  of 
which  the  note  discounted  was  the  evidence.  And 
the  sum  which  he  is  thus  at  any  time  entitled  to  call 
for,  so  long  as  it  stands  to  his  credit,  is  said  to  be 
deposited  in  the  bank,  or,  to  be  a  deposit  stand- 
ing in  his  name.  So,  too,  in  other  cases  of  so-called 
"loans*'  or  "discounts";  whatever  form  they  take 
and  whatever  the  collateral  security  held  by  the  bank 
may  be,  the  operation  is  after  all  essentially  an  ex- 
change of   rights,  whereby  the  bank   acquires   the) 


right  to  receive  money,  or  the  legal  tender  of  the 
country,  at  some  future  time,  and  the  individual 
acquires  the  right  to  call  for  money  or  legal  tender  at 
pleasure.  The  result  is  to  give  to  him  that  imme- 
diate command  of  purchasing  power  or  of  the  usual 
medium  of  payment  which,  as  we  have  said,  is  the 


14  CHAPTERS   ON   BANKING. 

real  object  sought  by  him  ;  but  at  the  outset  this 
result  is  usually  secured  and  the  relations  of  the  bank 
and  the  '*  borrower  "  are  settled,  by  the  sale  of  one 
right  for  another,  and  without  the  intervention 
of  money  or  any  of  its  tangible  substitutes/ 

But  the  deposit  may  owe  its  origin  to  a  different 
or  from  Operation  from  that  which  has  just  been 

some  other  examined.  It  happens  every  day  that  the 
operations,  merchant,  having  cash  in  hand,  prefers  not 
to  hold  it  in  his  possession  until  it  is  required  for 
use,  but  to  ''  deposit  "  it  with  the  bank  where  he 
usually  transacts  his  business,  until  he  needs  to  use 
1  it.  In  this  case,  when  he  makes  his  deposit,  the 
j  property  in  the  money  or  substitutes  for  money 
jactually  handed  in  by  him  passes  to  the  bank,  and 
jhe  receives  in  exchange  the  right  to  demand  and 
^receive  at  pleasure,  not  that  which  he  paid  in,  but 
an  equivalent  amount."  Here  then,  as  in  the  former 
case,  the  transaction  is  in  effect  a  sale,  although  the 
use  of  the  word  ^'  deposit  "  seems  at  first  to  justify 
an  entirely  different  idea  of  its  character. 

The   other   leading   operations    of    banks,   when 

'  The  less  usual  case  of  a  loan  made  in  cash  does  not  create  a 
a  deposit,  but  is  a  case  of  issue  if  the  bank  gives  its  own  notes  to  the 
borrower.  It  is,  however,  the  sale  of  a  right  for  a  right  in  every  case 
except  where  the  loan  is  made  in  actual  money,  when  it  becomes  the 
sale  of  a  right  for  coin. 

^  It  is  true  that  money  may  be  left  as  a  **  special  deposit''  with  a 
bank,  just  as  plate,  jewels,  or  other  valuables  may  be,  in  which  case, 
the  identical  money  deposited  is  to  be  returned,  and  the  bank  conse- 
quently does  not  acquire  the  property  in  the  thing  deposited,  but  is 
merely  entrusted  with  its  temporary  custody.  This,  however,  is  not  a 
banking  operation,  and  the  deposit  in  this  case  is  made  with  the  bank, 
not  because  it  is  a  bank,  but  because  it  owns  a  strong  vault. 


DISCOUNT,    DEPOSIT,   AND    ISSUE.  1 5 

analyzed,  can  also  be  resolved  into  cases  of  the  \ 
exchange  of  rights  against  rights,  or  of  rights  against  \ 
money.  As,  for  example,  when  the  bank,  for  the  x. 
convenience  of  its  customer  or  depositor,  undertakes 
to  collect  a  note  due  to  him  by  some  third  party,  in 
which  case  the  amount  paid  to  the  bank  in  money 
by  the  promisor  is  passed  to  the  credit  of  the 
promisee  as  a  deposit.  Here  the  bank  has  received 
money  for  the  account  of  the  depositor,  and  has 
given  to  him  in  exchange  a  right  to  draw  at  pleasure 
for  the  am.ount  or  any  part  thereof,  the  property  in 
the  money  actually  paid  having  passed  absolutely  to 
the  bank  in  exchange  for  the  right  to  draw.  And 
again,  when  the  bank  buys  from  a  merchant  a  bill  of 
exchange,  or  when  it  sells  a  bill  of  exchange  drawn 
by  itself  on  some  correspondent,  it  effects  an  ex- 
change of  money  against  a  right,  or  of  a  right  against 
money,  strongly  resembling  those  already  consid- 
ered. And  so,  too,  if  in  any  of  these  cases  any 
substitute  or  equivalent  for  money  is  used,  instead 
of  money  itself,  the  transaction  is  still  an  exchange 
of  a  right  on  the  one  side  and  some  means  of  . 
payment  on  the  other,  the  Jatter  becoming  the 
property   of   the   bank. 

We  have  thus  far,  for  the  sake  of  simplicity, 
spoken  only  of  the  '^  rights  to  receive "  money, 
bought  by  the  bank  in  one  class  of  cases,  and  sold 
by  it  in  another^  But  where  there  is  a  right  to 
receive  on  the  part  of  a  creditor,  there  is  a  corre- 
sponding duty  to  pay  on  the  part  of  the  debtor ; 
and  these  rights  or  credits,  when  viewed  from  the 
other  side,  are,  therefore,  debts  or  liabilities.     The! 


l6  CHAPTERS   ON   BANKING. 

deposit  which  is  credited  in  making  a  loan  is  accord- 
ingly a  liability  to  pay  on  demand,  assumed  by  the 
bank  in  exchangee  for  a  security  promis- 

means  the  *^  J      r 

bank's  liabiii-  ing  a  payment  to  the  bank  in  the  future ; 
ty  to  pay.  ^^^  ^j^^  deposit  Credited  upon  the  receipt 
of  cash  from  the  depositor  is  a  similar  liability, 
assumed  in  exchange  for  so  much  money  or  so 
much  of  its  substitutes.  In  short,  as  any  addition 
to  the  loans  of  a  bank  is  an  increase  of  its  invest- 
ments or  resources,  so  any  addition  to  its  deposits  is 
an  increase  of  its  debts  or  liabilities. 

A   little    consideration    of   the    manner  in   which 

notes    are   issued    by  banks  will  show  that   in    the 

.  ^^       bank-note  we  have  only  another  form  of 

Issue  IS  the         ...  .  .  . 

same,  in  all  liability,  differing  in  appearance,  but  not 
but  form.  j^  substaucc,  from  the  liability  for  de- 
posits. The  bank-note  is  the  duly  certified  promise 
I  of  the  bank  to  pay  on  demand,  adapted  for  circula- 
tion as  a  convenient  substitute  for  the  money  which 
it  promises.  *It  is  issued  by  the  bank,  and  can  be 
issued  only  to  such  persons  as  are  willing  to  receive 
the  engagement  of  the  bank  in  this  form  instead  of 
receiving  money,  or  instead  of  being  credited  with  a 
deposit."^  Thus  the  so-called  borrower,  who  in  the 
first  instance  has  been  credited  with  a  deposit  and 
to  whom  the  bank  is  therefore  to  this  extent  liable, 
may  prefer  to  draw  the  amount  in  notes  of  the 
bank  and  to  use  them  in  making  his  payments. 
But,  in  this  case,  it  is  plain  that  the  liability  of  the 
bank  is  changed  only  in  form  ;  it  is  still  a  liability 
to  pay  a  certain  sum  of  money  on  demand.  And 
so  if  the   depositor   pays    in    money   and    receives 


DISCOUNT,   DEPOSIT,   AND   ISSUE.  1/ 

notes,*  or  receives  notes  in  satisfaction  of  a  demand 
of  any  kind  against  the  bank,  he,  in  fact,  foregoes  the 
use  of  the  money  itself  and  consents  to  receive  in  its 
stead  a  promise  to  pay  upon  demand,  and  to  receive 
the  evidence  of  that  promise  in  the  form  of  notes. 
The  question,  in  which  form  he  shall  hold  his  right 
of  demand  against  the  bank,  is  one  to  be  decided  by 
the  nature  of  his  business  or  by  his  present  conven- 
ience, but  plainly  the  decision  of  this  question  in  no 
way  alters  the  relation  between  himself  or  any  trans- 
feree of  his  right,  on  the  one  hand,  and  the  bank  on 
the  other.     The  notes  issued  by  a  bank  are  thus  a  ; 
liability  distinguishable  in  form  only  from  its  liabili-  ( 
ty  for  deposits,  and  the   functions  of   deposit  and 
issue,  spoken  of   at    the    opening   of   this    chapter,  i 
instead   of   being  distinct,  as  is  often  assumed,  are  I 
one  in  substance. 

In  the  operations  which  have  now  been   consid-  ; 
ered  the  subject-matter  involved   is   in   every  case  j 
either  money  or  contracts  for  the  payment  thereof,  j 
No  form  of  dealing  in  merchandise  or  real  property 
comes    properly   within    the    province    of    banking. 
And,  inasmuch  as  a  contract   for  the  payment  of 
money  may  be  viewed   either  as  a  credit  or  as   a 
debt,  according  as  it  is  looked  at  from  the  one  side 
or  the  other,  banking  is  sometimes  described  as  the 
business  of  dealing  in  credits  and  sometimes  as  that 
of   dealing   in    debts.     For  the  transaction  of   this 
business  in  the  modern  world  both  of  the  functions 

*  In  early  English  banking  this  was  a  common  practice  and  no 
doubt  explains  the  phrase  "take  up  money  on  their  notes,"  used 
in  legislation.     See  Bagehot,  Lombard  Street^  p.  98, 


1 8  CHAPTERS   ON   BANKING. 

"  discount  "  and  "  deposit ''  are  indispensable.  In 
order  to  be  a  bank,  at  the  present  day,  an  estab- 
Discountand  ^ishment  must  carry  on  the  purchase  of 
deposit  essen-  rights  to  demand  money  in  the  future,  or 

tial  functions.  ...  i     •>  .1 

securities;  and  it  must  also  use  in  some 
form  or  other  its  own  engagements  for  the  payment 
of  money  upon  demand.^  If  it  practises  the  former 
only,  it  is  simply  an  investor  of  its  own  money, 
as  any  private  individual  may  be ;  if  it  practises  the 
latter  only,  it  may  indeed  be  said  to  be  a  bank  of  the 
obsolete  type  of  the  Bank  of  Amsterdam,  but  it 
then  plainly  ceases  to  answer  one  of  the  chief  pur- 

I  poses  of  a  modern  bank,  viz.,  that  of  enabling  indi- 
viduals to  convert  into  immediate  purchasing  power 

/  the  debts  which  are  due  to  them  in  the  future.  The 
use  of  the  third  function,  however,  that  of  issuing 
Issue  not  es-  notcs,  is  uot  indispensable  to  the  exist- 
sentiai,  ^^^^  ^f  ^  bank,  for,  as  has  been  shown, 

issue  is  but  a  modification  of  deposit,  and  is  made 
for  convenience  and  not  from  necessity.  There  are 
conditions  under  which  the  liability  of  the  bank  in 
the  form  of  notes  is  desired  for  use,  and  there  are 
also  conditions  under  which  the  liability  in  the  form 
of  deposits  better  serves  the  convenience  of  individ- 

^  See   in    Bagehot's   Lombard  Street,   p.    212,  a  remark  that  the 

Rothschilds  are  great  capitalists,  but  are  not  bankers.     The  defini- 

j  tion  of  a  bank  by  the  internal-revenue  act  of  the  United  States  of 

!'  1866  includes  "every  person,  firm,  or  company  having  a  place  of 
business  where  credits  are  opened  by  the  deposit  or  collection 
of  money  or  currency,  subject  to  be  paid  or  remitted  upon  draft, 
j  check,  or  order,  or  v^^here  money  is  advanced  or  loaned  on  stocks, 
bonds,  bullion,  bills  of  exchange,  or  promissory  notes,  or  where 
stocks,  bonds,  bullion,  bills  of  exchange,  or  promissory  notes  are 
received  for  discount  or  sale." — 14  Statutes  at  Large,  p.  115. 


DEPOSIT,   DISCOUNT,   AND   ISSUE.  I9 

uals  or  of  the  community.  Many  banks  in  every 
country,  therefore,  carry  on  a  large  and  successful 
business  without  making  any  issue  of  notes  whatever/ 
It  must  be  added  that  incorporation  by  law  is  not 
a  necessary  condition  of  the  existence  of  a  bank. 
Discount  and  deposit,  and  if  no  legal  nor  incorpora- 
prohibition  exists,  issue  also,  may  be  car-  *^°"  ^^  ^^^• 
ried  on  by  individuals  and  firms  as  well  as  by  in- 
corporated companies.  It  is  true  that  in  discussions 
of  banking  it  is  usual  to  give  almost  exclusive 
attention  to  incorporated  banks,  partly  because  they 
usually  hold  a  more  conspicuous  position,  and  partly 
because  their  affairs  are  in  some  degree  open  to 
official  inspection,  so  that  the  details  of  their  busi- 
ness are  known,  to  some  extent,  whereas  the  trans- 
actions of  private  banks  are  usually  known  only 
to  the  persons  concerned.  It  is  none  the  less  true, 
however,  that  in  the  economic  effects  of  their 
transactions  the  two  kinds  of  banks  do  not  differ, 
and  that  neither  can  be  neglected  in  an  examination 
of  the  economic  problemr  presented  by  any  com- 
munity in  which  it  is  found  to  exist. 

*  The  Comptroller  of  the  Currency  reports  that  in  1890  the  banks 
in  operation  in   the  United  States,   excluding  savings-banks,  were 

as  follows  : 

Number.  Capital  and  Surplus. 
State  Banks  and  Trust  Companies     .     2,250         $346  millions. 
National  Banks         ....     3,540  864       " 


Total 5,790      $1,210       " 

Of  these  banks  the  national  banks  alone  are  authorized  by  law  to 
issue  notes. 

In  November,  1882,  the  number  of  private  bankers  paying  the 
tax  then  levied  on  deposits  was  3,412.  The  term  is  applied  loosely, 
and  the  present  number  of  such  bankers  is  not  easily  estimated. 


CHAPTER  III. 

BANKING   OPERATIONS  AND   ACCOUNTS. 

Having  thus  taken  a  general  view  of  the  nature 
of  banking  operations,  it  is  now  necessary  that  we 
should  enter  upon  the  consideration  of  some  of  their 
details. 

For  a  bank,  as  well  as  for  any  other  considerable 
Capital  •  no  establishment,  it  is  requisite  that  a  capital 
rule  for  its  should  be  provided  at  the  outset.  There 
amoun  .  ^^^^  ^^  ^^  Constant  proportion  between 
the  amount  of  this  capital  and  the  extent  of  the 
business  which  may  be  built  up  by  its  means.  We 
can  only  say  that^ther  things  being  equal,  the  larger 
the  business  that  can  be  carried  on  with  safety  with 
a  given  capital,  the  larger  will  be  the  field  from 
which  profits  can  be  earned,  and  the  higher  the  pro- 
portion which  the  profits  will  bear  to  the  original 
investment ;  but  the  point  at  which  the  extension 
of  the  business  passes  the  line  of  safety,  must  be 
determined  by  the  circumstances  of  the  particular 
bank,  by  the  kind  of  business  carried  on  by  those 
dealing  with  it,  and  by  the  condition  of  the  com- 
munity in  which  it  is  established. )  The  attempt  has 
sometimes  been  made  to  limit  by  law  for  incorporated 
banks   the   proportion   of   transactions   for  a  given 


BANKING   OPERATIONS   AND   ACCOUNTS.  21 

amount  of  capital/  but  no. such  provision  has  any 
foundation  except  a  conjectured  average,  too  rough 
to  be  of  service  in  any  individual  case,  ^n  this 
respect,  as  in  so  many  others,  the  judgment  of  the 
persons  most  interested,  acting  under  the  law  of  self- 
preservation,  is  far  more  trustworthy  than  any  legis- 
lative decision.^ 

The  capital  thus  to  be  provided  at  the  outset  is,  of 
course,  in  the  case  of  a  private  bank,  the  contribution 
of  the  partners,  as  in  any  other  undertak-  shares  and 
ing.  In  the  case  of  an  incorporated  bank  shareholders.  ^ 
the  capital  is  divided  by  law  into  equal  shares  or  :r 
units  of  fixed  amount ;  as  e,g.^  under  the  law  of  the 
United  States,  a  capital  of  $100,000  is  divided  into 
1,000  shares  of  $100  each  ;  and  these  shares  are  con- 
tributed by  the  individual  shareholders,  in  such  pro- 
portion as  they  please.  The  law  may  as  a  matter  of 
public  policy  limit  the  proportion  of  capital  stock  to 
be  owned  by  any  one  individual  or  firm,  and  it  may 
also  limit  the  Hability  of  shareholders  for  debts  due 
by  the  bank,  in  case  of  its  failure ;  but  in  general,  ia 
the  absence  of  special  provisions  to  the  contrary,  the 
powers,  rights,  and  liabilities  of  every  shareholderN 
are  now  usually  determined  by  the  number  of  shares  / 
of  the  stock  contributed  or  owned  by  him.  In  the 
election  of  directors  and  of  other  officers  for  the 
immediate  management  of  the  business,  every  share 
entitles  its  owner  to  cast  one  vote ;  the  dividend  of 
profit  is  divided  in  the  ratio  of  shares  owned,  and 

*  E.  g.^  the  law  in  Massachusetts  formerly  limited  loans  to 
double  the  amount  of  the  capital.  See  Revised  Statutes  of  j 860^ 
c.  57.  §  25. 


22  CHAPTERS   ON   BANKING. 

contributions  to  meet  losses,  if  required  by  law,  are 
called  for  in  the  same  ratio. 

The  capital  subscribed  by  the  intending  share- 
holders must  necessarily  be  paid  in  in  money  or  in 
the  legal  tender  of  the  country.  It- is  not  necessary 
that  the  whole  should  be  paid  in  at  the  outset,  but 
the  payment  of  the  whole  usually  precedes  the  full 
establishment  of  the  business  ;  and,  in  the  case  of 
incorporated  banks,  the  law  often  requires  that  some 
definite  proportion,  as  e,  g,^  one  half,  shall  be  paid 
in  before  the  opening  of  business,  in  order  to  in- 
sure good  faith  and  a  solid  basis  for  the  business 
undertaken/ 

If,  now,  we  undertake  to  represent  by  a  brief 
statement  of  account  the  condition  of  a  bank  having 
a  capital  of  $100,000  paid  in,  in  specie,  on  the  morn- 
ing when  it  opens  its  doors  for  business,  we  shall 
have  the  following : 

Liabilities.  Resources, 

Capital     .     .     .     $100,000  Specie     .     .     .     $ioo,ckx) 

It  may  at  first  sight  appear  to  be  a  contradiction 
Ca  itai  ^^^  terms,  that  the  capital  should  be  set 

viewed  as  a  doWh  as  a  Ijabiljly  and  not  as  a  resource, 
la  1  ity.  g^^  ^^  must  here  distinguish  between  the 
financial  liability  for  what  has  been  received  from 

^  The  English  joint-stock  banks  present  some  remarkable  cases  of 
partially  paid  capital.  Thus  the.  largest,  the  London  and  West- 
minster, has  ;^20  in  the  ;i£'ioo  paid  up  on  its  shares,  and  the  London 
Joint-Stock  Bank  has ^i"  15.  In  these  cases,  the  business  having  been 
fully  established  by  means  of  a  part  only  o|  the  nominal  capital,  the 
liability  of  the  shareholders  to  contribute  the  remainder  in  case  of 
need  constitutes  a  species  of  guaranty  fund  of  great  amount. 


BANKING    OPERATIONS  AND   ACCOUNTS.  23 

the  shareholders  and  the  right  of  property  in  the 
thing  received.  The  bank  has  become  accountable 
to  its  shareholders  for  the  amounts  paid  in  by  them 
respectively,  but  the  money  actually  paid  in  has 
become  the  property  of  the  bank ;  or,  in  the  lan- 
guage of  accountants,  the  bank  has  become  liable  for  . 
its  capital,  and  the  money  in  hand  is  for  the  present 
its  resource  for  meeting  this  liability,  or  for  explain- 
ing the  disposition  made  of  what  has  been  received^ 
As  the  bank  requires  bank'ing-rooms  and  a  certain 
supply  of  furniture  and  fixtures  for  the  convenient 
transaction  of  its  business,  we  may  suppose  it  to 
expend  $5,000  of  its  cash  in  providing  this  **  plant.** 
The  property  thus  procured,  with  the  remaining 
$95,000  in  cash,  will  then  be  the  aggregate  resources 
by  means  of  which  the  capital  is  to  be  accounted 
fof,  and  the  account  will  stand  as  follows : 

Liabilities.  Resources. 

Capital     .     .     .     $100,000  Real  estate,  furniture, 

fixtures,  etc.      .     .   $5,000 
Specie 95,ooQ 


$100,000  $100,000 

The  bank,  however,  cannot  answer  the  purposes 
of  its  existence,  or  earn  a  profit  for  its  shareholders, 
until  its  idle  cash  is  converted  into  some  kind  of 
interest-bearing  security.  Nor  is  it  enough  that  a 
permanent  investment  of  the  ordinary  p^^.  o^t, 
kind  should   be  made,  as  by  the  simple    credit  must 

,  r      .  1  If  z.  be  used  also. 

exchange    of    the  *  cash    for    government 

bonds  or  railway  securities.     It  is  the  chief  business 

of  the  bank  to  afford  to  purchasers  and  dealers  the 


24  CHAPTERS   ON   BANKING. 

means  of  using,  by  anticipation,  funds  which  are 
receivable  by  them  in  the  future,  and  this  implies 
both  the  purchase  of  private  securities  or  "  business 
paper "  to  a  considerable  extent,  and  also  frequent 
change  and  renewal  of  purchases.  Moreover,  while 
the  private  capitalist  finds  it  advantageous  to  make 
simple  investments  of  a  permanent  sort,  this  would 
plainly  be  insufficient  for  the  shareholders  of  a  bank, 
who  have  to  pay  from  its  profits  some  serious  ex- 
penses of  management,  and  need,  therefore,  a  larger 
field  for  earnings  than  the  ordinary  returns  on  their 
capital  alone.  The  bank  being  obliged  then  to  ex- 
tend its  operations  beyond  the  amount  of  its  capital, 
is  compelled  for  this  purpose  to  make  use  of  its  credit., 
f  In  fact,  it  is  only  by  such  a  use  of  its  credit  that 
\  the  establishment  becomes  in  reality  a  bank. 

Most    of    the   conditions    of    the   case   are   best 
answered  by  the  "  discount "  of  commercial 

Commercial  .  i  'i        i         'T'i         .  •  r 

paper.  paper  as  above  described,      ine  time  for 

which  such  obligations  have  to  run  varies 
with  the  custom  of  the  trade  which  gives  rise  to 
them,  but  is  in  most  cases  short  enough  to  imply 
early  repayment  to  the  bank.  And  even  where 
custom  gives  the  paper  longer  time,  if  the  paper 
itself  is  used  only  as  a  collateral  security,  the  note 
I  which  is  the  actual  object  of  negotiation  with  the 
\  bank  is  by  preference  usually  made  not  to  exceed 
four  months.  It  is  easy  then  to  arrange  the  pur- 
chases of  paper  with  reference  to  the  times  of 
maturity,  so  as  to  provide  for  a  steady  succession  of 
payments  to  the  bank,  and  thus  facilitate  the  reduc- 
tion of  the  business,  if  necessary,  or  its  direction 


BANKING   OPERATIONS   AND   ACCOUNTS.  2$ 

into  new  channels,  as  prudence  or  good  policy 
may  require.  The  certainty  of  prompt  payment  at 
maturity,  needed  for  this  end,  is  presented  in  a  high 
degree  by  the  paper  created  in  the  ordinary  course 
of  business.^  Independently  of  the  collateral  security 
which  the  bank  may  hold,  the  written  promise  of  a 
merchant  or  manufacturer  to  pay  on  a  fixed  day  is 
an  engagement  which  involves  the  credit  of  the 
promisor  so  far  that  failure  is  an  act  both  of  legal  in- 
solvency and  of  commercial  dishonor.  Selected  with 
judgment,  then,  such  paper  is  not  only  the  invest- 
ment which  most  completely  answers  the  purposes 
of  the  bank's  existence,  but  is  probably  as  safe  as 
any  investment  which  could  be  found. 

It  may  easily  happen,  however,  that  the  bank  may 
find  it  desirable  to  invest  a  part  of  its  re-  other 

sources  in  some  other  form,  either  because  investments, 
good  commercial  paper  cannot  be  procured  in  suffi- 
cient amount,  or  as  a  matter  of  policy.  In  this  case 
it  will  purchase  such  other  securities  as  offer  not  only 
complete  safety  of  investment,  but  the  possibility  of 
easy  conversion  into  cash  in  case  of  need.^     In  this 

^  The  reports  of  a  large  commercial  agency  show  that,  for  fifteen 
years,  1875-89,  the  number  of  failures  in  the  United  States  was  a 
little  over  one  per  cent,  of  the  whole  number  of  houses  reported  as 
in  business.  For  a  curious  estimate  showing  that  the  liabilities  of 
failed  firms  in  1874  amounted  to  less  than  one  fourth  of  one  per  cent, 
of  the  total  commercial  liabilities  of  the  country  for  the  year,  see  Com^ 
viercial  and  Financial  Chronicle y  February,  1875,  p.  129. 

"^  See  in  the  reports  of  the  Comptroller  of  the  Currency,  the 
**  United  States  bonds  on  hand  "  and  **  other  stocks  and  bonds  "  held 
by  the  national  banks  and  amounting  to  nearly  $118,000,000  in  Octo- 
ber, 1890.  Compare  also  tht  **  government  securities  "  held  by  the 
banking  department  of  thej§ank  of  England. 


26  CHAPTERS   ON   BANKING. 

country  United  States  bonds,  and  many  descriptions 
of  State,  municipal,  and  corporation  bonds  might 
answer  this  purpose.  Stocks  would  more  rarely 
answer  it,  being  more  liable  to  the  fluctuations  in 
price  caused  by  misfortune  or  the  ordinary  vicissi- 
tudes of  business.  Mortgages  of  real  estate,  how- 
ever, would  not  be  admissible,  except  when  held  as 
a  security,  collateral  to  some  other  which  is  more 
easily  convertible,  for  even  when  the  mortgaged 
property  is  so  ample  and  stable  as  to  insure  the 
goodness  of  the  mortgage,  the  conversion  of  the 
mortgage  into  cash  by  sale  is  not  always  easy,  and  is 
especially  difficult  at  those  times  when  the  bank 
most  needs  to  have  all  its  resources  at  command. 
Indeed,  the  danger  to  be  apprehended  from  the 
locking  up  of  resources,  in  securities  which  may  be 
solid  but  are  not  easily  realized,  is  so  great,  that  it 
has  been  said  to  be  the  first  duty  of  the  banker  to 
learn  to  distinguish  between  a  note  and  a  mortgage, 
his  business  lying  with  the  former.  Real  estate,  of 
course,  cannot  be  regarded  as  a  banking  security, 
however  desirable  it  may  be  as  an  investment  for  in- 
dividuals, for  it  is  not  only  subject  to  great  fluctua- 
tions in  value,  but  is  at  times  unsalable  ;  and  the  law 
of  the  United  States  therefore  wisely  prohibits  invest- 
ments in  it  by  the  national  banks,  except  so  far  as  is 
necessary  for  the  accommodation  of  their  business.* 

The  results  of  the  process  of  investment  in  com- 
mercial paper  and  in  other  securities  are  best  under- 
stood when  we  trace  the  effect  in  the  account  of  the 

*  See  Revised  Statutes ,  §  5137. 


BANKING   OPERATIONS   AND   ACCOUNTS. 

bank.  Taking  then  the  account  as  it  stood  on  page 
23,  let  us  suppose  that  the  bank  buys  paper  or  securi- 
ties from  those  dealing  with  it,  or,  in  the 
common  phrase,  makes  '^  loans  to  its  cus-  TcTou^nt, 
tomers,"  to  the  amount  of  $90^000,  the  caused  by 
paper  being  in  many  pieces  and  having 
various  lengths  of  time  to  run,  but  averaging  about 
three  months.  Supposing  the  interest  to  be  com- 
puted at  six  per  cent.,  we  should  have  the  account 
changed  by  the  operation  as  follows : 

Liabilities,  Resources. 

Capital     .     .     .     $100,000         Loans    .     .     .     .     $90,000  '♦ 
Undivided  profits    .     1,35-0         Real  estate,  furniture, 
Deposits      .     .     .      88,650  fixtures,  etc.    .     .     5,000 

Specie     ....      95,000 

$190,000  $190,000 

Here  we  have  the  securities  which  certify  the  right 
of  the  bank  to  demand  and  receive  $90,000  at  a  fu- 
ture date  placed  among  the  resources ;  the  net  pro- 
ceeds of  the  securities,  or  the  aggregate  of  the  sums^ 
which  the  bank  holds  itself  liable  to  pay  for  them  on 
demand,  stand  among  the  liabihties  as  deposits  ;  and 
the  interest  deducted  in  advance,  or  the  profit  on 
the  operation,  which  the  bank  must  at  the  proper 
time  account  for  to  the  stockholders,  also  stands  as 
a  liabilitj^J^  This,  however,  is  the  condition  of  the 
account  at  the  rnoment  of  making  the  investment, 

^  As  this  profit  is  not  realized  until  the  discounted  paper  is  fina]ly  paid, 
the  interest  deducted  in  advance  is  often  carried  to  a  separate  account 
for  the  time  being,  to  be  transferred  later  to  the  undivided  profits. 
This  method  is  not  universal,  however,  and  in  the  present  discussion 
the  simpler  statement  appears  to  be  sufficient. 


28 


CHAPTERS   ON   BANKING. 


when  the  bank  has  made  its  purchase  of  securities 
by  merely  creating  a  liability.  As  this  liability  is 
real  and  must  be  met,  so  far  as  the  de-  .  u   .^ 

'  ^  and  by  the 

positors  at  any  time  see  fit  to  press  it,  let  withdrawal 
us  suppose  that  depositors  call  for  cash  to  ^^  «^^p°s**»* 
the  amount  of  $15,000,  and  we  shall  have  a  further 
change  in  the  account  as  follows: 


Liabilities, 

Resources, 

Capital   .     .     .     $100,000 

Loans     .     .     .       $90,000 

Undivided  profits       1,350 

Real  estate,  etc. ,         5,000 

Deposits      .     .         73,650 

Specie     .     .     .         80,000 

$175,000 


$175,000 


It  is  clear  that,  unless  the  enforcement  of  the  lia- 
,  bility  for  deposits  and  consequent  withdrawal  of 
specie  goes  much  farther  than  this,  the  bank  can 
safely  increase  its  loans  or  its  purchase  of  securities, 
although  its  method  of  doing  so  is  by  the  increase  of 
its  liabilities.  We  will  suppose  it,  therefore,  to  have 
expanded  its  affairs  until  it  has  reached  something 
like  the  average  condition  in  1888-89  ^^  those  banks 
in  the  United  States,  which,  being  incorporated 
under  the  laws  of  the  several  States,  are  not  author- 
ized to  issue  notes.     It  will  then  stand  thus: 


Liabilities. 

Resources. 

Capital    .... 

$100,000 

Loans      ..... 

$305,000 

Surplus  .... 

29,000 

Bonds  and  stocks  . 

23.000 

Undivided  profits 

IO,COO 

Real  estate  .     .     . 

15,000 

Deposits       .     .     . 

305,000 

Other  assets      .     . 

20,000 

'  •• 

Expenses  .          .     . 

1,000 

,    Cash  items    .     .     . 

) 

Specie     .... 

\     80,000 

Legal-tender  notes 

) 

$444,000 


$444,000 


BANKING   OPERATIONS   AND   ACCOUNTS.  29 

Postponing  for  the  present  the  consideration  of 
some  terms  which  here  occur  for  the  first  time,  it  ap- 
pears from  the  above  account  that  purchases  of  secu- 
rities have  been  made  to  more  than  three  times  the 
amount  of  the  capital,  and  that  this  has  been  effected 
chiefly  by  the  creation  of  Habilities  in  the  increase 
form  of  deposits.  What  determines  the  of  loans 
limit  to  which  this  process  can  be  carried  ?  i"i»  e  , 

If  depositors  seldom  demanded  the  payment  to 
which  they  are  entitled,  but  were  contented  with  the 
mere  transfer  of  their  rights  among  themselves  as  a 
conventional  currency,  the  bank  might  dispense  with 
holding  any  large  amount  of  specie  or  cash  in  any 
form  and  keep  most  of  its  resources  employed  in  its 
productive, securities.  The  expansion  of  the  depos- 
its would  then  resemble  in  its  effects  the  expansion 
of  any  other  currency  and  might  go  on  until  a  check 
should  be  interposed  by  the  consequent  rise  of  prices 
and  demand  for  specie  for  exportation.  And  it  is 
true,  as  we  shall  see,  that  in  communities  where 
banking  is  largely  practised,  the  use  of  deposits  as 
currency  by  transfer  from  hand  to  hand  is  so  exten- 
sive, that  a  bank  in  good  credit  can  rely  upon  their 
being  withdrawn  so  slowly,  or  rather  to  so  small  an 
extent,  as  to  make  it  unnecessary  to  have  cash  in 
readiness  for  the  payment  of  more  than  a  small  pro- 
portion at  any  given  moment.  But  in  a  period  of 
financial  disorder  or  alarm,  withdrawals  may  be  made 
earlier  or  more  frequently,  and  a  larger  provision  of 
cash  may  be  needed  for  safety,  than  at  other  times ; 
the  kind  of  business  carried  on  by  depositors  may 
expose  one  bank,  or  the  banks  in  one  place,  to  heav- 


30  CHAPTERS    ON    BANKING. 

ier  occasional  demands,  or  may  on  the  other  hand 
make  demands  steadier,  than  is  the  case  elsewhere ; 
and  a  city  bank  may  be  more  subject  to  heavy  calls 
from  depositors  than  a  country  bank.  In  general, 
then,  for  every  bank,  in  its  place  and  under  the  cir- 
cumstances of  the  time,  there  is  some  line  below 
which  its  provision  of  cash  cannot  safely  fall.  This 
provision  of  cash,  which  in  the  account  last  given  in- 
cludes the  cash  items,  specie,  and  legal-tender  notes, 
is  called  the  reserve,  and  the  necessity  of  maintaining 
by  need  ^  Certain  minimum  reserve  fixes  a  limit  to 

of  cash  the  ability  of  the  bank  to  increase  its  se- 

reserve.  ...  t^  i       •  i  •  r 

cunties.  ror  obviously  any  mcrease  of 
securities,  that  is,  of  loans  or  bonds,  must  ordinarily 
be  effected,  either  by  an  increase  of  deposits,  or  by 
an  actual  expenditure  of  cash.  In  the  one  case  the 
proportion  of  reserve  to  demand  liabilities  would  be 
weakened  by  the  increase  of  liabilities ;  in  the  other 
it  would  be  weakened  by  the  decrease  of  cash.  If, 
then,  the  reserve  were  already  as  low  as  prudence 
would  allow,  or  were  threatened  by  approaching 
heavy  demands  from  depositors,  no  increase  of  se- 
curities could  be  made  without  serious  risk. 

What  proportion  the  reserve  should  bear  to  the 
The  ratio  of    liabilities  which  it  is  to  protect  is  a  ques- 
reserve  to      tion    which   the   law   has   sometimes   at- 
tempted to  settle,  by  requiring  a  certain 
minimum,*  leaving  it  to  every  individual  bank   to 

^  The  law  of  the  United  States,  under  which  the  national  banks  are 
established,  recognizes  twenty-five  per  cent,  as  the  minimum  reserve 
for  city  banks,  and  fifteen  per  cent,  as  the  minimum  for  country 
banks.     Revised  Statutes y  §  5 191. 


BANKING  OPERATIONS  AND  ACCOUNTS.    3 1 

determine  for  itself  how  much  may  be  required  in 
addition  to  this  minimum.  And  this  is  no  doubt  as 
far  as  any  general  rule  can  go.  As  has  already  been 
suggested,  the  requirements  for  safety  of  different 
banks  and  in  different  places  must  vary,  and  so  must 
the  requirements  of  the  same  bank  at  different  times.* 
In  fact,  the  question  as  to  the  proper  amount  of 
reserve  never  depends  simply  on  the  absolute  ratio 
of  the  reserve  to  the  liabilities,  but  always  involves 
further  questions  as  to  the  probable  receipts  of  cash 
by  the  bank  and  probable  demands  upon  it,  in  the 
near  future.  It  can  only  be  said  that  the  reserve 
should  be  large  enough,  not  only  to  insure  the  im- 
mediate payment  of  any  probable  demand  from 
depositors,  but  also  to  secure  the  bank  from  being 
brought  down  to  the  "  danger  line  "  by  any  such 
demand.  If  twenty-five  per  cent,  is  the  minimum 
consistent  with  safety,  the  reserve  should  be  far 
enough  above  this  to  be  secure  from  reduction  to  a 
point  where  any  further  demand  or  accident  may 
make  the  situation  hazardous.' 

In  the  management  of  its  reserve  the  bank  itself 
necessarily  feels  a  strong  conflict  of  interests.  On 
the  one  hand,  it  is  impelled  to  increase  its  securities 
as  far  as  possible,  for  it  is  from  them  that  it  derives 
its  profits,  and  the  retention  of  a  large  amount  of 
idle  cash  is  felt  as  a  loss.     On  the  other  hand,  the 

*  The  Bank  of  England  may  be  content  with  a  reserve  amounting  to 
33  per  cent,  of  its  deposits,  as  in  October,  1885,  or  it  may  be  uneasy 
with  a  reserve  amounting  to  44  per  cent.,  as  in  September,  1890. 

^  For  a  discussion  of  this  subject,  see  Bagehot's  Lombard  Street^ 
chapter  xii. 


32  CHAPTERS    ON    BANKING. 

maintenance  of  a  reserve  sufficient,  not  only  to  en- 
able the  bank  to  continue  its  payments  but  to  inspire 
the  public  with  confidence  in  its  ability  to  continue 
them,  is  a  necessity  of  its  existence,  even  though  a 
part  of  its  resources  do  thus  appear  to  be  kept  per- 
manently idle.  As  a  natural  consequence,  the  actual 
settlement  of  the  question  in  favor  of  a  large  or  of  a 
small  reserve  in  any  particular  case  will  depend  in 
good  measure  on  the  temperament  of  the  managers, 
not  fixed  in  ^^  evcry  banking  community  may  be 
practice  by  found  "conservative"  banks,  the  caution 
of  whose  managers  forbids  them  to  take 
risks  by  extending  their  business  at  the  expense  of 
an  ample  reserve  ;  and  by  their  side  may  be  seen  the 
more  "  active  "  banks,  whose  managers  habitually 
spread  all  possible  sail,  and  provide  for  the  storm 
only  when  it  comes. 

It  is  to  be  observed  that  the  necessity  of  providing 
^L  a  cash  reserve  is  not  met  by  the    excel- 

JU^Good  securi- 

'  ties  no  sub-  Icnce  of  the  securities  held  by  the  bank, 
stitute    for    Althoue^h  their  certainty  of  payment  at 

cash  reserve.  °  -'  i     y 

maturity  be  absolute,  still  the  demands 
upon  the  bank  are  demands  for  cash,  and  cannot  be 
answered  by  the  offer  of  even  the  best  securities.  If 
the  depositor  or  creditor  does  not  receive  cash  in 
full  for  his  demand  when  it  is  made,  the  bank  has 
failed,  and  any  satisfaction  of  his  claim  by  the  de- 
livery of  a  security  is,  as  it  were,  only  the  beginning 
of  a  division  of  the  property  of  the  bank  among  its 
creditors.  Specie,  therefore,  or  the  paper  which  is  a 
substitute  for  it  as  a  legal  tender  for  debt,  forms  the 
real  banking  reserve.     The  reserve  of  the  bank  may, 


BANKING    OPERATIONS    AND    ACCOUNTS.  33 

however,  be  greatly  strengthened  by  the  judicious 
selection  of  securities.  For  example,  if,  in  the  ac- 
count above  given,  the  '^  bonds  and  stocks  "  are,  as 
they  should  be,  of  descriptions  which  are  readily 
salable,  they  afford  the  means  of  replenishing  the 
reserve  in  case  of  need,  without  foregoing  the  enjoy- 
ment of  an  income  from  this  amount  of  resources  for 
the  present.  In  extreme  cases  of  general  financial 
panic,  it  is  true,  even  the  strongest  government 
securities  may  find  but  few  purchasers  ^ ;  still  such  a 
provision  is  the  best  support  which  can  be  had  in  the 
absence  of,  or  as  an  auxiliary  to,  a  sufficient  reserve 
of  actual  cash. 

The  natural  method  of  securing  the  proper  appor- 
tionment of  resources  between  securities 

.  Reserve  reg- 

and  reserve,  under  ordmary  circumstances,  uiated  by 
is  by  increasinsf  or  diminishinsf  the  loans,  loaning 

/  .  ^.  ,  ,       ^  more,  or  less. 

or,  m  other  words,  the  purchases  of  securi- 
ties made  from  day  to  day  in  the  regular  course  of 
business.  That  part  of  the  securities  which  consists 
of  the  promises  of  individuals  or  firms  to  pay  to  the 
bank  at  fixed  dates,  is  made  up  of  many  such  pieces 
of  commercial  paper,  maturing,  if  properly  mar- 
shalled, in  tolerably  steady  succession.  The  pay-* 
ment  of  one  of  these  engagements  when  it  becomes 
due  may  be  made  either  in  money,  or  by  the  sur- 
render to  the  bank  of  an  equal  amount  of  its  own 
liabilities,  as  will  be  shown  in  the  next  chapter.  In..^ 
the  former  case,  the  payment  of  the  maturing  paper 

^  In  the  London  market  in  the  panic  of  May,  1866,  there  was  a 
moment  when  even  **  consols  were  unsalable."  Patterson,  Science  of 
Finance ^  p.  223.  .... 

3 


34  CHAPTERS    ON    BANKING. 

to  the  bank  is  in  fact  the  conversion  of  a  security 
into  cash,  and  increases  the  reserve  without  change 
in  the  Habilities ;  in  the  latter,  the  reduction  of 
securities  is  balanced  by  a  reduction  of  liabilities 
which  raises  the  proportion  of  reserve.  If,  then, 
the  bank  stops  its  '^  discounts  "  or  the  investments 
in  new  securities,  or  if  it  even  slackens  its  usual 
activity  in  making  such  investments,  the  regular 
succession  of  maturing  paper  will  gradually 
strengthen  its  reserve  ;  if  it  increases  its  activity  in 
investment,  it  will  lower  or  weaken  its  reserve  ;  and 
if  it  adjusts  the  amount  of  its  new  investments  to 
the  regular  stream  of  payments  made  by  its  debtors, 
it  may  keep  the  strength  of  its  reserve  unaltered, 
until  some  change  in  the  condition  of  affairs  brings 
cash  to  it  or  takes  cash  away  by  some  other  process. 
This  natural  dependence  of  the  reserve  upon  the 
more  or  less  rapid  re-investment  of  its  resources  by 
the  bank  is  distinctly  recognized  by  the  law  of  the 
United  States,  which  provides  that  when 

This  fact  ,  .  .  i      i         i        r    n 

recognized      the    rescrve   of  any    national    bank    falls 
by  law  and  bclow   the    Icral    minimum,    such    bank 

practice.  ^ 

"  shall  not  increase  its  liabilities  by  mak- 
ing any  new  loans  or  discounts,"  until  its  reserve 
has  been  restored  to  its  required  proportion/  By  a 
less  harsh  application  of  the  same  principle,  the 
Bank  of  England  operates  upon  its  reserve  by  low- 
ering or  raising  its  rate  of  discount,  and  thus  encour- 
aging or  discouraging  applications  for  loans.  And 
it  was  with  a  view  of  facilitating  the  replenishment 

*  Revised  Statutes  of  the  IJnited  States,  §  5X91. 


BANKING   OPERATIONS  AND   ACCOUNTS.  35 

of  the  reserve  by  the  curtailment  of  loans,  that 
the  law  of  Louisiana  formerly  provided  that  the 
banks  in  New  Orleans  should  hold  what  were 
called  "short  bills,'*  or  paper  maturing  within 
ninety  days,  to  the  amount  of  two  thirds  of  their 
cash  liabilities,  so  that  the  constant  stream  of 
payments  of  such  paper  might  always  insure  to 
every  bank  the  early  command  of  a  large  part  of 
its  resources/ 

To  return,  in  conclusion,  to  the  account  given  on 
p.  28 ;  we  have  there  among  the  liabilities  certain 
sums  classified  as  "  surplus "  and  as  '^  undivided 
profits."  Taken  together  these  sums  represent  the 
profits  which  have  been  made,  but  not  divided 
among  the  stockholders,  and  which  are  certain  usu- 
therefore  to  be  accounted  for  by  the  bank,      ai  heads  of 

n-ii  1*1  •  /•     1  r  accounts. 

i  The  surplus  is  that  portion  of  these  profits 
•  which  as  a  matter  of  policy  it  has  been  determined 
not  to  divide  and  pay  over  to  the  stockholders,  but 
to  retain  in  the  business,  as  in  fact,  although  not  in 
name,  an  addition  to  the  capital.  The  remaining 
portion,  the  undivided  profits,  is  the  fund  from 
which,  after  payment  of  current  expenses  and  of  any 
losses  which  may  occur,  the  next  dividend  to  the 
stockholders  will  be  made.  The  current  expenses 
are  for  the  present  entered  on  the  other  side  of  the 
account,  as  they  represent  a  certain  amount  of  cash 
which  has  disappeared  ;  but  at  the  periodical  settle- 

*  See  some  remarks  on  the  excellent  effects  of  the  Louisiana  system 
by  Samuel  Hooper,  Theory  and  Effects  of  Laws  Regulating  Specie  in 
Banks ^  i860.  For  the  law  itself,  Acts  of  the  Third  Legislature  of 
Louisiana,  1857,  p.  104. 


36  CHAPTERS    ON    BANKING. 

ment  of  accounts  they  must  be  deducted  from  the 
undivided  profits,  and  will  thus  drop  out  from  the 
statement.  '^  Other  assets,"  here  set  down  as  an 
investment,  may  be  supposed  to  cover  any  form  of 
property  held  by  the  bank  and  not  otherwise  classi- 
fied, but  especially  the  doubtful  securities,  or  such 
property,  not  properly  dealt  in  by  a  bank,  as  it  may 
have  been  necessary  to  take  and  to  hold  temporarily, 
for  the  purpose  of  securing  some  debt  not  otherwise 
recoverable.  For  example,  although  the  bank  could 
not  properly  invest  in  a  mortgage,  it  might  be  wise 
for  it  to  accept  a  mortgage  in  settlement  with  an 
embarrassed  debtor,  and  in  this  case  the  mortgage 
f  would  stand  among  the  *^  other  assets."  And,  finally, 
\  "  cash  items  "  include  such  demands  on  individuals 
-  \)r  other  banks  as  are  collectible  in  cash  and  can 
therefore  fairly  be  deemed  the  equivalent  of  cash  in 
hand.  In  the  absence  of  any  legal  provision  limit- 
ing the  classification  of  such  demands  as  reserve, 
they  may  be  regarded  as  virtually  a  part  of  the 
reserve,  which  in  the  case  before  us  may  therefore 
be  treated  as  made  up  of  cash  items,  specie,  and 
legal-tender  notes. 

.To  illustrate  what  has  been  said  in  this  chapter 
we  will  now  suppose  the  bank,  with  its  afTairs 
standing  as  on  page  28,  to  make  the  following 
operations  : 

a.  To  add  to  its  securities  $20,000,  by  discount  of 
three-months  paper  at  six  per  cent.,  three  fourths 
being  purchased  by  the  creation  of  liabilities,  and 
one  fourth  by  the  expenditure  of  cash.  The  account 
would  then  stand  as  follows : 


BANKING    OPERATIONS   AND    ACCOUNTS.  3/ 

Liabilities.  _  Resources^  ^ 

Capital    .     .     .    $100,000  Loans     .     .     .     $325,000    '%^   ^ 

Surplus    .     .     .         29,000     :^  "  Bonds  and  stocks      23,000 

Undivided  profits     10,300^  Real  estate .     .         15,000 

Deposits       .     .       319,775  iSll^'j  Other  assets      .         20,000 

'^  ^  Expenses     .     .  1,000 

$459,075  $459,075 

b.  To  (Retrace  its  steps  by  diminishing  its  *Mis- 
counts*  or  holding  of  securities  to  the  extent  of 
$50,000,  of  which  four  fifths  are  paid  to  it  by  the 
surrender  of  demands  for  deposits  to  a  Hke  amount 
and  one  fifth  in  cash  ;  to  pay  $1,250  for  current  ex- 
penses ;  and  further  to  increase  its  reserve  by  the 
sale  of  bonds  and  stocks  to  the  amount  of  $10,000. 
The  following  would  then  be  the  state  of  the 
account : 


Liabilities. 

Resources. 

Capital    .     .     .    $100,000 

Loans     .     .     .     $: 

275,000 

Surplus    .     .     .         29,000 

Bonds  and  stocks 

13,000 

Undivided  profits     10,300 

Real  estate  .     . 

15,009 

Deposits       .     .      279,775 

Other  assets     . 

20,000 

Expenses     .     . 

2,250 

Reserve  .     .     . 

93.825 

$419,075  $419,075 

c.  To  sell  $2,000  of  its  other  assets  for  cash  with 
a  loss  of  $500 ;  to  make  a  semi-annual  dividend  of 
four  per  cent.,  of  which  one  half  is  credited  to  stock- 
holders who  happen  to  be  depositors  alsp,  and  one 
half  is  paid  m  cash  ;  to  sell  $4,000  of  bonds  at  \ 
profit  of  fifteen  per  cent.;  and  to  carry  $i,000  of  its 
undivided  profits  to  surplus.      The  account  Would 


38 


CHAPTERS   ON   BANKING. 


then  stand  at  the  beginning  of  the  new  half  year,  as 
follows: 

Liabilities.  \  Resources. 

Capital    .     .     .    $100,000,       -  Loans     .     .     .     $275,000 

Surplus    .     .     .        30,000     '^v  Bonds  and  stocks        9,000  ^ 

Undivided  profits       3,150  Real  estate  .     .         15,000 

Deposits.     .     .      281,775^  Other  assets     .         18,000*^ 

^  Reserve  .     .     .         97,9^5 


$414,925 


$414,925 


CHAPTER  IV. 

THE   CHECK   SYSTEM. 

In  the  preceding  chapter  reference  has  been  made 
more  than  once  to  the  transfer  of  deposits  by  one 
holder  to  another,  and  to  their  consequent  Deposits 
use  as  currency.      It  is  now  necessary  to  used  as 

examine  more  closely  the  simple  machinery  currency, 
by  which  this  transfer  is  effected.  The  depositor,  or 
the  creditor  of  a  bank,  who  has  to  make  a  payment 
to  some  other  person,  has  his  choice  between  two 
methods  of  making  it.  He  may  demand  money 
from  the  bank,  in  the  exercise  of  his  right  as  a 
creditor,  and  deliver  this  money ;  or,  with  the  assent 
of  the  person  to  whom  he  has  to  make  „.     ,   , 

^  Simplest  case 

payment,  he  may  give  to  this  person  an  of  payment 
order  on  the  bank  for  the  money,  or  what  ^y  check, 
is  commonly  called  a  check.  If  he  adopts  the  latter 
method,  a  payment  for  goods  or  of  a  debt  is  effected 
by  the  simple  transfer  of  a  right  to  demand  money 
from  the  bank  ;  and  so  too  if  the  recipient  of  the 
check  gives  it  in  payment  to  some  third  person,  and 
he  to  a  fourth,  arid  so  on.  To  this  extent  the  check 
is  plainly  made  a  substitute  for  the  sum  of  money 
for  which  it  calls.  It  represents  no  particular  money 
or  g^oup  of  coins,  for,  as  we  have  seen,  the  deposit 

39  :^? 


40  CHAPTERS    ON    BANKING. 

is  likely  to  have  been  created  by  the  bank  in  ex- 
change for  some  security  bought  by  it,  and 'is,  there- 
fore, a  naked  right  to  demand,  and  not  a  claim  to 
any  particular  cash  ;  and  even  if  the  deposit  originated 
in  the  lodging  of  money  by  the  depositor,  it  has  in 
this  case  also  become  a  naked  right  to  demand  and 
does  not  imply  any  claim  to  the  money  actually  de- 
posited. But  the  transfer  of  this  naked  right,  in  the 
case  supposed,  is  made  by  the  agreement  of  the 
parties  to  serve  the  same  purpose  as  the  transfer  of 
money,  and  the  right  thus  becomes  a  substitute  for 
money. 

The  effectiveness  of  this  substitution,  however,  is 
increased  and  the  use  of  the  deposit  greatly  pro- 
longed, where  it  is  the  practice  for  the  transferee 
himself  to  deposit  the  check,  instead  of  demanding 
its  payment  by  the  bank,  or  seeking  his  opportunity 
to  use  it  in  some  payment  of  his  own. 

If  we  suppose  all  the  parties  concerned  to  keep 
their  accounts  with  a  single  bank,  and  suppose  a 
check  for  $2,000  to  have  been  drawn  by  A  against 
his  deposit  in  the  bank  and  given  by  him  to  B  in 
payment  for  goods,  B  may  deposit  this  check  to  his 
own  credit  as  he  would  money.  The  bank  then 
makes  the  necessary  changes  in  its  accounts,  cancels 
its  liability  for  $2,000  to  A  and  recognizes  a  liability 
for  a  like  amount  to  B,  and  the  transfer  of  the  right 
by  A  to  B  is  thus  made  complete.  This  novation, 
or  change  of  creditors,  to  which  the  bank  has  made 
itself  a  party,  has  not  only  secured  B  against  the 
possibility  of  finding  A's  deposit  in  the  bank  ex- 
hausted by  other  checks  drawn  by  A  fraudulently  or 


THE    CHECK    SYSTEM.  4I 

by  mistake,  but  it  has  also  made  B's  right  of  demand 
against  the  bank  divisible  at  pleasure,  since  this,  in- 
stead of  a  right  to  demand  a  determinate  sum,  has 
now  become  a  right  to  draw  his  own  check  or  checks 
to  an  amount  not  exceeding  $2,000  in  all.  In  this 
way  checks  become  the  instruments  by  which  rights 
to  demand  money  may  be  transferred  from  one 
individual  to  another  in  such  amounts  as  the  trans- 
actions between  them  may  require  ;  and  when  we 
consider  the  great  security  and  convenience  of 
transfer  by  such  means  as  compared  with  actual 
payment  in  money,  there  is  little  need  of  further 
explanation  of  the  astonishing  extent  to  which 
checks  are  now  used,  especially  in  English-speaking 
communities.* 

If,  now,  we  suppose  the  parties  concerned  to  keep 
their  accounts  with  different  banks  in  the^^     , 

Complex  case, 

same  city,  we  shall  have  results  somewhat  where  banks 

1  1-^  ^j'£f  A.    •       I'l  are  numerous. 

more  complex  but  not  different  m  kmd. 
In  this  case  we  may  suppose  the  check  drawn  by  A 
upon  Bank  No.  i  to  be  deposited  by  B  ill  Bank  No.  2. 
If  the  transaction  stands  alone,  the  latter  bank  col- 
lects the  money  called  for  by  the  check,  and  holds 
itself  liable  to  make  payment  to  B  on  demand  in 
sums  to  suit  his  pleasure.  This  makes  a  change,  not 
only  of  creditors,  but  of  debtors,  and  yet  at  the  close, 

^  In  July,  1890,  the  deposit  accounts  in  the  banks  of  the  United 
States  and  United  Kingdom,  excluding  those  with  private  bankers, 
were  nearly  as  follows  : 
United  States,  national  banks         ....       $1,552,000,000 

*'  **       State  *'     (estimated)         .         .  525,000,000 

United  Kingdom,  joint-stock  banks        .         .         .         3,000,000,000 

**  *'  Bank  of  England        .         .         .  165,000,000 


42  CHAPTERS   ON   BANKING. 

after  the  payment  by  A  to  B  has  been  completed,' 
we  have  in  existence  a  bank  liability  of  the  same 
amount  as  that  with  which  we  started.  Probably, 
however,  in  a  community  where  there  were  several 
banks,  the  transaction  would  not  stand  alone.  At 
the  end  of  a  day's  business  every  bank  would  be 
likely  to  have  received  in  deposit  checks  upon  several, 
and  perhaps  all,  of  the  others  ;  each  would  then  have 
checks  to  meet  as  well  as  checks  to  collect ;  and  each 
would  naturally  make  its  settlement  with  every  other, 
not  by  making  mutual  demands  and  mutual  pay- 
ments, but  by  the  offsetting  of  demands  and  the 
payment  only  of  such  balance  as  might  then  remain 
due  from  one  or  the  other.  Thus,  if  at  the  end  of 
the  day  Bank  No.  i  had  received  in  deposit  checks 
upon  Bank  No.  2,  to  the  amount  of  $25,000,  and 
Bank  No.  2,  in  like  manner,  checks  upon  Bank  No.  I 
amounting  to  $23,000,  the  account  as  between  the 
banks  would  be  settled  easily  by  the  payment  of 
$2,000  by  Bank  No.  2  to  Bank  No.  i.  And  the  re- 
sult is  the  same  if  the  operation  here  traced  is  multi- 
plied by  the  number  of  banks  carrying  on  business 
with  each  other  in  a  great  city.  The  settlement  of 
accounts  by  the  banks  with  each  other,  however,  still 
leaves  the  banks  collectively  under  the  same  liability 
for  payment  on  demand  as  before.  The  liability  rests 
upon  the  banks,  it  may  be,  in  different  proportions, 
and  is  differently  distributed  among  the  creditors : 
but  so  long  as  payments  are  made  by  checks  and 
checks  deposited,  the  right  to  demand  from  a  bank 
which  is  called  a  deposit  continues  to  exist  in  some- 
body's   possession,   and   is   as  well    fitted    to    dis- 


THE    CHECK    SYSTEM.  43 

charge    the    office   of   money   as  when  it*  was    first 
created/ 

This  medium  of  payment  acquires  great  perfec- 
tion wherever  the  Clearing-House  system 
is  adopted.  Under  this  system  there  is  a  p^erfeJte^ 
daily  meeting  of  clerks  representing  all  by  clearing 
the  banks  carrying  on  business  at  any 
common  centre.  Every  bank  there  turns  in  at  a 
central  office  all  the  checks  and  cash  demands  which 
it  holds  against  others  and  is  credited  therewith,  and 
is  also  charged  with  all  checks  and  demands  brought 
against  it  in  like  manner  by  others.  The  checks  and 
demands  which  have  thus  been  credited  to  and 
charged  against  each  bank  are  then  summed  up,  and 
the  balance  found  to  be  owed  ,by  or  due  to  each 
bank,  as  the  case  may  be,  it  then  pays  to  or  receives 
from  the  central  office  in  money.  By  this  means  a 
great  mass  of  transactions,  which  would  otherwise  re- 
quire a  series  of  dem^ands  by  each  bank  upon  every 
other,  are  settled  at  once,  and  the  transportation  of 
large  sums  in  cash  from  one  bank  to  another  is  to  a 
great  extent  dispensed  with." 

*  A  statement  of  the  working  of  the  check  system,  under  circum- 
stances of  different  degrees  of  complexity,  is  given  by  Jevons, 
Money  and  the  Mechanism  of  Exchange^  pp.  252-257. 

'^  For  a  further  notice  of  the  Clearing-House  system,  see  note  on  p. 
52.  The  transportation  of  cash  referred  to  in  the  text  is  reduced  to 
its  minimum  by  the  practice  sometimes  adopted  of  using  ''Clearing- 
House  certificates  "  instead  of  money  or  legal-tender  notes.  These 
certificates  represent  money  or  notes  deposited  with  the  Clearing 
House,  or  with  some  bank  which  is  its  representative  for  this  purpose, 
and  are  payable  on  demand  ;  being  made  in  convenient  denomina- 
tions they  are  used  in  payments  between  the  banks,  and  for  the  pur- 
poses of  reserve  are  recognized  by  the  law  of  the  United  States  as  the 


44  CHAPTERS  ON   BANKING. 

Under  this  arrangement  the  bank  deposit,  circu- 
lated by  means  of  checks,  becomes  the  most  conven- 
ient means  of  payment  yet  devised.  A  stroke  of  the 
pen  transfers  it  in  whatever  amount  is  needed  for 
the  largest  transaction,  and  this  transfer  instantly 
becomes  the  basis  for  fresh  operations,  with  as 
complete  security  against  accidental  loss  as  can  be 
imagined.  In  the  strict  economic  sense  this  medium, 
no  doubt,  has  rapidity  of  circulation  in  a  high  degree, 
while  in  the  sense  of  actual  activity  of  movement  in 
a  given  time  it  far  outstrips  money  or  notes,  and  has 
been  well  said  to  be  the  most  volatile  of  all  the  me- 
diums of  exchangee.    Of  the  entire  circu- 

and  deposits  ^ 

made  the  latmg  mcdium  of  this  country  it  forms 
of'^a  m^et't""  incomparably  the  greatest,  although  the 
least  considered,  part.  Depending  for  its 
efficiency  solely  upon  convention  and  issued  as  well 
by  private  firms  as  by  incorporated  banks,*  it  for  the 
most  part  eludes  the  regulations  which  legislatures 
so  industriously  enforce  upon  the  other  constituents 
of  the  currency.  Indeed,  beyond  the  requirement 
of  a  minimum  reserve  to  be  held  by  incorporated 
banks,  made  by  the  law  of  the  United  States,  we 
may  say  that  the  subject  is  not  touched  by  legisla- 

equivalent  of  the  cash  which  they  represent.  Revised  Statutes^ 
§  5192.  The  same  object  is  secured  in  London,  where  banks  and 
bankers  keep  their  cash  balances  at  the  Bank  of  England,  by  transfers 
at  that  Bank. 

^  Of  the  twenty-seven  members  of  the  London  Clearing  House, 
twelve  are  private  banking  houses.  *'  The  joint-stock  banks  were  not 
admitted  until  1854,  nor  the  Bank  of  England  until  ten  years 
later."  Gilbart,  Principles  and  Practice  of  Bankings  (edition  of 
1873),  452. 


THE  CHECK   SYSTEM.  ,  45 

tion,  in  this  country  or  elsewhere.  The  necessity  for  j 
payment  in  specie  upon  demand,  which  is  the  most 
important  safeguard  of  value,  is  the  result  of  the 
general  provision  for  the  payment  of  debts  of  any 
kind.  And  the  chief  assurance  against  excessive 
expansion  on  the  part  of  any  single  establishment  is 
given  by  the  certain  demand  for  prompt  and  fre- 
quent settlement,  occasioned  by  the  voluntary  estab- 
lishment of  the  Clearing  House,  or  by  the  habits  of 
the  community,  but  not  by  law. 

i-v*'What  natural  limit  is  to  be  found  then  to  the 
continued  circulation  of  a  liability  for  deposit  when 
once  it  is  created  and  set  in  motion  by  the  process  of 
"  discount "  ? 

Plainly,  if  at  any  stage  the  holder  of  a  check,  in- 
stead of  depositing  it,  demands  its  payment  in  money 
by  the  bank  on  which  it  is  drawn,  the  payment 
extinguishes  the  liabiHty  to  that  extent.  It  is  quite 
possible  that  the  money,  after  a  brief  circulation, 
may  find  its  way  back,  in  fresh  deposits  of  cash 
made  by  one  or  more  individuals,  and  so  a  new  lia- 
bility similar  to  the  old  one  may  come  into  existence  ; 
but,  nevertheless,  we  may  fairly  say  that  the  use  of 
the  original  deposit  as  a  substitute  for  money  came 
to  a  natural  close  with  the  payment  of  the  check. 
Except,  however,  in  the  cases  where  money  is  re-  ' 
quired  for  some  special  purpose,  as  to  be  sent  abroad 
or  to  some  other  part  of  the  country,  or  for  the 
increase  of  the  stock  in  the  hands  of  the  public,  this 
limit  to  the  circulation  of  deposits  is  not  of  great 
importance.  For,  as  the  withdrawal  of  specie  under 
ordinary  circumstances   is  merely  the    exchange  of 


46  CHAPTERS   ON   BANKING. 

one  medium  of  payment  for  another,  any  withdrawal 
on  a  large  scale  would  imply  such  a  change  in  the 
habits  and  preferences  of  the  public  as  is  not  often  or 
easily  made. 

A  more  important  limit  is  found,  however,  in  the 
use  of  deposits  for  the  payment  of  debts  due  to  the 
bank.     That  the  depositor  can,  to  the  extent  of  his 

deposit,  pay  a  debt  due  from  himself  to 
wn^c°enl^d  by  ^^^  bank  by  the  relinquishment  of  the 
payments  to  bank's  debt  to  him,  needs  no  explanation. 

In  practice  he  draws  his  own  check  in 
favor  of  the  bank  and  exchanges  it  for  the  obligation 
held  against  him  by  the  bank,  this  mutual  release 
being  for  each  side  as  effectual  a  discharge  of  liability 
as  a  payment  in  money  could  have  been.  Such  a 
payment  of  the  debt  due  by  the  depositor,  and  pre- 
viously standing  among  the  securities  or  loans  of  the 
bank,  finally  cancels  a  liability  of  the  bank,  equal  in 
amount  to  that  which  was  created  when  the  loan  was 
made.*  It  matters  little  by  what  process  the  de- 
posit, or  right  of  demand,  finally  used  by  the  de- 
positor in  payment  came  into  his  possession.  If  he 
is  a  merchant,  he  has  probably  collected  smaller  sums 
which  were  due  to  him,  for  the  purpose  of  his  pay- 
ment to  the  bank,  and  these  smaller  sums  are  likely 
to  have  come  to  his  hands  to  a  great  extent  in  the 
shape  of  checks,  which,  as  we  have  seen,  were  the 
instruments  for  transferring  to  him  the  rights  of 
demand  which  others  held  against  the  bank.  If  he 
borrowed  the  means  of  payment,  he  in  all  probability 
received  the  amount  in  a  check.  Nor  is  the  case 
*  Compare  the  statement  of  account  for  operation  b,  on  p.  37. 


THE   CHECK   SYSTEM.  47 

different  when  there  are  several  banks,  and  the  de- 
positor has  received  his  collections  in  checks  drawn 
upon  other  banks  than  his  own.  As  was  seen  when 
we  were  considering  this  method  of  payment  on 
page  41,  the  deposit  of  these  checks  to  his  credit 
effects  a  transfer  of  the  liability  from  the  other 
banks  to  his  own ;  and  here  also  this  liability  is 
finally  extinguished  when  he  uses  it  in  payment  of 
his  debt  to  the  bank. 

It  is  possible,  indeed,  that  the  payment  should 
be  made  by  the  debtor  to  the  bank  in  money,  or  by 
a  check  drawn  against  a  fresh  deposit  of  money,  and 
in  this  case  either  there  is  no  extinguishment  of 
bank  liability  by  the  payment,  or  only  the  new  lia- 
bility created  by  the  fresh  deposit  is  extinguished. 
But  in  a  community  where  banking  is  firmly  and 
widely  established,  the  great  payments  of  commerce 
and  of  general  business  are  certain  to  be  made,  for 
the  most  part,  in  the  medium  which  is  most  acces- 
sible and  most  convenient  for  use  in  large  sums,  and 
this  medium  is  undoubtedly  that  which  is  commonly 
termed  bank  deposits.^ 

'  It  has  been  found  by  inquiry  that  in  New  York,  at  two  different 
dates  in  1881,  98.7  per  cent,  of  the  total  receipts  of  the  banks  were 
in  checks  and  similar  instruments  calling  for  cash  at  sight.  In  the 
United  States  as  a  whole  the  proportion  was  94.6  per  cent.  See 
Comptroller  s  Report  iox  l88r,  pp.  13-23.  Another  important  investi- 
gation of  the  same  kind  was  made  by  the  Comptroller  at  two  corre- 
sponding dates  in  1890,  with  the  remarkable  result  that  in  New  York 
the  proportion  of  checks  and  drafts  was  found  to  be  96  and  95.6  per 
cent.,  and  in  the  United  States  as  a  whole  92.5  and  91  per  cent.  In 
London  the  proportion  was  stated  several  years  ago  to  be  97.2  per 
cent.     Comptroller's  Report  for  l8go<  pp.  22-32. 


48 


CHAPTERS   ON   BANKING. 


It  appears  then  that  deposits  are  created  by  the 
Hence  a  cor-  act  of  the  bank,  when  loans  are  increased, 
respondence   ^^^  ^^iR^  ^^ley  are  Cancelled  when  loans  are 

of  loans  and  ^  -^ 

.deposits.  paid.'  There  is,  therefore,  a  rough  corre- 
jspondence  between  the  movements  of  loans  and  of 
'deposits.  This  correspondence  may  be  weakened 
by  the  actual  flow  of  money  to  or  from  the  bank, 
but  in  the  ordinary  movements  of  business  it  is  tol- 
erably close,  and  where  it  fails  the  apparent  excep- 
tion will  be  found  to  be  explained  by  some  special 
condition  of  the  case.'*  It  will  be  found  in  general 
that,  at  times  when  banks  are  increasing  their  opera- 
tions, their  deposits  swell,  and  that  when  they  are 
contracting,  their  deposits  fall.  The  true  connec- 
tion between  these  movements  is  often  forgotten, 
but  its  nature  cannot  be  mistaken  by  anybody  who 
will  observe  the  steps  by  which  an  ordinary^*  dis- 
count "  is  placed  at  the  command  of  the  borrower. 

^  For  some  striking  remarks  on  this  subject,  see  Hamilton's  report 
on  a  National  Bank,  Works  (Lodge's  edition),  iii.,  128.  See  also 
Quarterly  Journal  of  Ecotiomics,  i.,  403. 

2  The  weekly  statements  of  the  New  York  banks  for  November, 
1890,  are  a  good  illustration  of  the  movement  of  loans  and  deposits, 
at  a  period  of  great  financial  disturbance,  when  there  was  a  heavy 
contraction  of  loans  and  some  serious  withdrawals  of  cash.  The 
aggregates,  stated  in  millions,  are  as  follows  : 


Loayts. 

Deposits. 

Specie  and 
Legal  Tender, 

November    i 

.      .    $399- S      . 

$396.3       . 

.     $99.8      - 

8      . 

.      .       398.9      . 

392.2       . 

.       95.5 

15      . 

•      .      393.3      . 

386.6       . 

.       95.8 

"         22 

.      .      387.3      . 

381.7       . 

.       95.5 

"         29      . 

.      .      384.6      . 

378.6       . 

.        95. 

For  the  special  conditions  affecting  the  banks  during  these  weeks, 
see  the  Commercial  and  Financial  Chronick^  passim. 


THE   CHECK   SYSTEM.  49 

It  has  already  been  suggested  that  the  use  of  de- 
posits and  checks  is  most  highly  developed  among  the 
English-speaking  peoples.  That  the  scat-  use  of  de- 
tered  branches  of  the  English  race  should  P°f "  ^^^^'- 

o  ed  by  nation- 

in  this  respect  have  followed  the  example  ai  habit, 
of  the  mother  country  is  not  surprising  ;  but  the  rea- 
sons for  the  difference  in  practice  between  England 
and  the  Continent  are  not  so  clear.*  The  difference 
itself,  however,  is  strongly  marked.  The  American 
or  Englishman  who  is'  in  the  habit  of  receiving  and 
making  frequent  payments  avoids  the  keeping  of 
cash  in  hand,  deposits  his  receipts,  and  pays  all 
except  the  smallest  sums  by  checks.  As  a  conse- 
quence, the  establishment  of  a  bank  is  an  early 
symptom  of  the  growth  of  trade  in  a  small  com- 
munity of  English  blood.  But  even  in  large  cities 
the  French  or  German  trader  finds  it  most  natural 
to  keep  his  own  strong  box ;  even  large  establisl> 
ments  adopt  but  slowly  the  practice  of  depositing. 
And  in  Italy,  where  banks  of  deposit  flourished  long 
before  their  introduction  into  England,  they  are 
sparingly  used  and  make  their  way  with  some  diffi- 
culty against  the  more  recent  national  habit.  In 
these  cases  the  silent  choice  of  custom,  which  leads 
one  people  to  prefer  coin  and  another  notes  and  a 

*  Mr.  Bagehot  plausibly  conjectures  that  the  immunity  of  England 
from  foreign  invasion  and  domestic  revolution  has  made  the  growth 
of  confidence  possible,  to  a  degree  not  permitted  by  the  disturbed 
condition  of  the  Continent  for  generations  past.  Lombard  Street^ 
p.  go.  But  this  explanation  appears  unsatisfactory,  in  view  of  the 
frequently  robust  faith  of  Continental  traders  and  speculators,  and  of 
the  ease  with  which  English-speaking  peoples  establish  deposit  banks 
under  the  most  untoward  circumstances. 
4 


50  CHAPTERS   ON   BANKING. 

third  to  prefer  a  mixed  currency,  also  leads  to  the 
personal  custody  and  direct  delivery  of  cash.  The 
effect  is  to  be  seen,  not  only  in  the  distribution  of 
banking  institutions,  as  to  which  the  difference  be- 
tween the  countries  named  is  extreme,  but  also  in 
the  proportion  which  the  deposits  of  the  great  banks 
in  those  countries  respectively  bear  to  their  loans  or 
private  securities.*  Upon  the  Continent  there  is  also 
a  preference  for  holding  the  engagement  of  the 
bank  in  the  form  of  a  note,  rather  than  in  that  of  a  de- 
posit, but  in  England  or  America,  if  the  note  is  used 
for  any  thing  beyond  the  small  purchases  of  every-day 
life,  it  is  usually  from  necessity  rather  than  choice. 

Peculiarities  of  national  character  are  not  the  only 
conditions,  however,  which  affect  the  use  of  deposits 
and  by  local  as  Currency  in  a  given  country.  The  ex- 
conditions.  tended  use  of  a  deposit  and  check  system 
n^v^essarily  implies  convenient  access  to  banks  and 
also  a  certain  extended  scale  of  operations.  Ceteris 
,  paribus^  then,  the  system  will  naturally  be  stronger 
j  where  population  is  dense  or  communication  easy, 

*  The  published  accounts  of  several  jg^eat  banks,  at  nearly  the 
same  time  in  October,  1890,  afford  tljRjfollowing  comparative  state- 
ment, the  several  currencies  being  reduced  to  dollars,  at  the  rate  of 
£\  or  25  francs  for  $5,  and  the  amounts  given  in  millions  and  tenths 
of  millions : 


Loans. 

Deposits. 

Notes. 

Bank  of  England    .     .     . 

.  I130.5 

$145. 

$127. 

**      **  France       .     .     . 

.      183.7 

70.2 

604.4 

*'      "   Belgium    .     .     . 

.        63.1 

13.2 

74.4 

**      "   Netherlands  .     . 

.        52.5 

9-5 

86.5 

Reichsbank  of  Germany  . 

.      195. 1 

78.7 

282.9 

Austro-Hungarian  Bank  . 

.      H5.5 

226.8 

Banks  of  New  York    .     . 

.      401. 

413. 

3.5 

THE   CHECK   SYSTEM.  5 1 

tlian  in  a  sparsely  settled  country  or  where  inter- 
course IS  difficult ;  manufactures,  commerce,  and 
general  trade  will  afford  it  a  better  field  than  agri- 
culture ;  and,  comparing  one  period  with  another,  its 
development  in  a  country  with  increasing  population 
and  capital  and  with  diversified  pursuits  will  be 
progressive  and  rapid.  Accordingly  we  find  that  in 
the  United  States  the  city  banks  have  extended  the 
deposit  system  much  farther  than  the  country 
banks  ^ ;  that  in  1890  the  system  is  developed  much 
farther  than  in  1875  ;  and  that,  to  compare  the 
banking  of  half  a  century  ago  with  that  of  to-day, 
the  United  States  Bank  at  the  height  of  its  prosperity 
was  in  this  respect  in  as  marked  contrast  with  the 
national  banks  of  to-day,  as  are  the  banks  on  the 
continent  of  Europe.'*  The  full  extent  to  which  thi.s 
development  has  now  gone  is  seen,  not  in  the  mere 

*  The  reports  of  the  national  banks  for  July,  1875  and  i8go,  show  the 
comparative  standing  of  the  "reserve  city  "  banks  and  of  the  country 
banks  to  have  been  approximately  as  follows,  representing  capital  and 
surplus  in  each  case  by  100  : 

City.  Country. 

187S'      ^^90'  187S'      iSgo. 

Capital       .....     i-oo        100  100        100 

Loans 187        275  130        199 

Individual  deposits  .     .     144        215  77        158 

Notes    ......       34            6  60          19 

'  A  comparispn  of  the  second  United  States  Bank,  at  its  greatest 
expansion  in  1832,  with  the  average  condition  of  all  the  national 

banks  in  July,  1890,  taking  the  proportions  for  an  equal  amount  of 
capital,  shows  the  following  contrast : 

i8j2.  j8go. 

Capital    .     ...     .     35  millions.  35  millions. 

Loans 70       **  104       " 

Individual  deposits     .9        **  83       ** 

Notes      .....     26        "  7       " 


52 


CHAPTERS   ON   BANKING. 


amount  to  which  bank  deposits  have  risen  on  the 
average,  but  in  the  vast  aggregate  of  transactions 
effected  by  this  rapidly  circulating  medium,  as  shown 
in  the  reports  of  the  Clearing  House.  These  reports 
contain  the  record  of  a  mass  of  business,  inconceiv- 
able in  its  amount  and  complexity,  such  as,  it  is  cer- 
tain, could  not  have  come  into  existence  without  the 
aid  of  this  powerful  agent.^ 

NOTE, 
To  illustrate  the  working  of  the  Clearing-House  system,  we  will 
suppose  the  case  of  six  banks  carrying  on  business  in  the  same  town. 
On  a  given  morning  we  will  suppose  the  messengers  of  these  banks  to 
meet  at  the  Clearing  House,  each  bringing  the  checks  received  by  his 
bank  in  deposit  on  the  previous  day,  as  follows  : 


No.  I, 

checks  on 

No.  2, 

$6,500 

No.  4, 

checks ( 

on 

No.  I,    $8,750 

<( 

(< 

"     3, 

9,200 

(( 

It 

"     2,      4,700 

i« 

** 

"     4, 

7,100 

" 

i< 

"     3,      6,740 

It 

<< 

"     5. 

6,250 

<( 

II 

"     5,      5,820 

<( 

<( 

*'     6, 

4,500 

<( 

II 

"     6,      5,140 

$33,550 

$31,150 

No.  2, 

checks  on 

No.  I, 

$7,800 

No.  5. 

checks 

on 

No.  I,    $8,740 

l( 

(( 

"     3, 

4,100 

*« 

II 

**     2,     4,620 

<( 

4( 

"     4, 

5,760 

II 

li 

"     3,      9,250 

<( 

«* 

"     5, 

6,340 

II 

li 

"    4,      7,680 

(( 

**    \ 

5,870 
$29,870 

II 

II 

**     6,      5,940 
$36,230 

No.  3 

checks  on 

No.  I, 

$6,750 

No.  6, 

on 

No.  I,    $3,700 

•* 

it 

"      2, 

4,270 

li 

II 

**      2,       4.100 

<( 

li 

"     4. 

5,900 

n 

II 

**     3,     6,740 

•* 

<( 

"     5, 

6,400 

(< 

i« 

"    4,     9.250 

(i 

(< 

"     6, 

5,940 

** 

II 

"     5,      7,850 

$29,260 


$31,640 


The  sum  of  all  the  checks  brought  in  is  $191,700.  If,  now,  we 
credit  each  bank  with  the  checks  which  it  presents  against  the  others, 
and  charge  it  with  the  checks  presented  by  them  against  it,  we  shall 


THE   CHECK    SYSTEM.  53 

find  that  No.  I  is  charged  with  $35,740  and  credited  with  $33,550, 
that  No.  2  is  charged  with  $24,190  and  credited  with  $29,870,  and  so 
for  the  others,  and,  therefore,  that. 

No.   I    owes    a    balance    of         $2,190 


No.   2  is  owed 

$5,63o 

No.   3      owes 

6,770 

No.  4      owes 

4,540 

No.   5  is  owed 

3,570 

No.   6  is  owed 

4,250 

$13,500     $13,500 

If,  then,  the  debtor  banks,  Nos.  i,  3,  and  4,  pay  into  the  Clearing 
House  the  sums  due  from  them  amounting  to  $13,500,  and  the  Clear- 
ing House  pays  out  to  the  creditor  banks,  Nos.  2,  5,  and  6,  the  sums 
due  to  them,  of  like  amount,  the  result  will  be  that  every  bank  will, 
in  effect,  have  coUecteS  paym^t  of  all  the  checks  which  it  had  re- 
ceived, and  will  have  made  payment  of  all  the  checks  drawn  against 
it.  This  settlement  of  checks  amotinting  in  all  to  $191,700  will  have 
been  made  by  the  payment  of  $13,500,  and  transactions  apparently 
involving  thirty  separate  demands,  each  bank  being  the  creditor  of 
five  others,  will  have  been  settled  by  a  series  of  additions  made  at  a 
central  office,  followed  by  three  payments  to  and  three  payments  from 
a  common  fund. 

An  account  of  the  transactions  of  the  New  York  Clearing  House, 
one  of  the  two  largest  in  existence,  is  given  in  the  CoiTiptroller  s  Re- 
port ior  1890,  p.  69.  In  1884  that  Clearing  House  settled  the  bal- 
ances of  sixty-one  banks,  and  of  the  Assistant  Treasurer  of  the  United 
States.  "  In  1881,  the  year  of  largest  business,  the  average  daily  ex- 
changes were  $159,232,191,  the  transactions  on  some  days  approach- 
ing $300,000,000  ;  and  these  exchanges  were  settled  by  the  payment 
of  balances  averaging  daily  only  $5,823,010.  Since  the  foundation  of 
the  establishment  in  1853,  the  balances  actually  paid  have  amounted 
on  the  average  to  only  4.4  per  cent,  of  the  exchanges  effected.  For 
the  details  of  the  process  of  clearing,  see  Bolles,  Practical  Bankings 
for  the  clearing  houses  of  the  United  States  ;  and  Gilbart,  Principles 
and  Practice  of  Banking,  for  the  London  Clearing  House.  For  the 
present  wide  extension  of  the  system  in  this  country  and  elsewhere, 
see  a  pamphlet  by  D.  P.  Bailey,  The  Clearing- House  System,  reprinted 
from  the  Banker  s  Magazine  (New  York),  1890  ;  also  Raucbherg,  Der 
Clearing  und  GirO'  Verkehr, 


CHAPTER  V. 

BANK-NOTES. 

It  has  already  been  said  that  the  notes  of  a  bank 

are  a  liability  distinguishable  in  form,  but   not  in 

substance,  from   its  deposits.     The  cred- 

identity  of      itor   of    a   bank  of   issue   has   his  choice 

deposits  and  between  taking  the  evidence  of  his  right 

notes,  ^  ^ 

in  the  form  of  a  note,  and  taking  it  in  the 
form  of  an  entry  in  the  books.  For  his  use  one 
form  may  be  preferable  to  the  other ;  if  he  desires 
to  make  payments  in  small  sums,  as  for  \V^es,  he 
may  prefer  to  take  notes;  if  he  is  to  make  large 
payments,  or  expects  a  little  delay  in  the  use  of  his 
funds,  he  is  quite  certain  to  prefer  being  credited 
with  a  deposit.  But,  whatever  his  choice,  the  lia- 
bility of  the  bank  to  make  payment  in  money  on 
demand  is  the  same,  and  it  is  under  the  same  neces- 
sity of  providing  itself  with  a  reserve,  sufficient  to 
meet  any  demand  which  experience  shows  to  be 
probable.  To  illustrate  this  part  of  the  subject  we 
will  take  the  account  given  on  page  38,  and  sup- 
pose the  depositors  to  have  drawn  one  third  of  their 
deposits  in  notes  of  the  bank,  which  have  thus  been 
thrown  into  circulation : 

54 


BANK-NOTES. 

Liabilities. 

Resources. 

Capital     .     .     .  $100,000 

Loans        .     .     .  $275,000 

Surplus     .     .     .       30,000 

Bonds  and  stocks        9,000 

Undivided  profits       3,150 

Real  estate    .     .       15,000 

Notes        .     .     .       93,925 

Other  assets  .     .       18,000 

Deposits   .     .     .     187,850 

Reserve    .     .     .       97,925 

55 


$414,925  $414,925 

It  is  obvious  from  inspection  that  if  any  demand 
upon  the  bank  weakens  its  reserve,  it  makes  no  dif- 
ference whether  the  demand  is  from  depositors  or 
noteholders  ;  the  security  of  the  remaining  liabili- 
ties, of  whatever  kind,  is  impaired  to  the  same  degree 
in  either  case,  and  the  same  precautionary  measures 
for  replenishment  will  have  to  be  taken.  And  so,  if 
fresh  loans  are  made,  the  relation  of  reserve  to  de- 
mand liabilities  is  altered,  whether  the  loans  are 
effected  by  an  increase  of  deposits  or  of  notes.  The 
law  does  not  always  recognize  this  close  ^^^  always 
similarity  of  the  two  kinds  of  liability,  recognized 
It  has  sometimes  required  a  reserve  for  ^  ^^' 

the  protection  of  notes  alone,  under  the  apparent 
impression  that  this  must  secure  the  solvency  of  the 
bank,  and  it  sometimes  makes  a  provision  for  a 
reserve  of  different  amount  for  the  notes,  as  in  the 
national-bank  system  of  the  United  States,  hav- 
ing in  view  the  different  degrees  of  the  probable 
demand  for  payment  of  notes  and  of  deposits  re- 
spectively.^   Apart,  however,  from  considerations  like 

^  The  national  banks  are  now  required,  by  the  Act  of  1874,  to  have 
a  reserve  of  only  five  per  cent,  for  the  protection  of  their  notes, 
which  is  held  by  the  Treasury  as  the  central  redeeming  agency.  18 
Statutes  at  Large,  123.  The  bonds  deposited  to  secure  the  circulation 
against  insolvency,  it  is  to  be  noticed,  are  in  no  sense  a  reserve,  and 
are  not  so  described  by  the  law. 


56  CHAPTERS    ON    BANKING. 

the  last,  the  two  forms  of  habiHty  seem  to  stand 
upon  the  same  footing.  The  bank,  itself  finds  the 
same  advantage  in  the  one  as  in  the  other.  Its 
profit  is  made  from  the  securities  which  it  holds,  and 
whatever  profit  it  makes  beyond  the  mere  interest 
on  the  investment  of  its  capital,  results  from  the 
holding  of  securities  purchased  by  means  of  its 
credit;  but  the  rate  of  this  profit  is  in- no  way 
dependent  upon  the  process  by  which  that  credit  is 
transferred  from  one  creditor  to  another. 

The  bank,  in  short,  is  interested  simply  in  provid- 
ing that  form  of  credit  which  is  most  convenient  for 
the  use  of  the  community  on  which  it  depends,  for 
/it  is  by  that  means  that  it  can  do  the  greatest 
amount  of  business  and  hold  the  greatest  amount  of 
securities.  Hence  we  see  a  remarkable  difference  in 
the  issues  of  city  and  of  country  banks,  carried  on 
under  the  same  system  and  with  the  same  privileges.* 
The  deposit,  transferred  by  check,  is  more  conven- 
ient for  large  transactions  than  the  note,  being  more 
expeditious  and  safer  ^;  it  is  in  the  cities  that  trans- 

^  See  p.  5T,  note.  A  striking  illustration  of  the  same  point  is  to 
be  found  in  the  condition  of  the  national  banks  of  New  York  City, 
compared  with  those  of  Massachusetts,  outside  of  Boston,  the 
amounts  of  capital  being  nearly  the  same.  Tlie  figures,  here  given 
only  in  millions,  are  for  September  30,  1884,  when  the  circulation  of 
bank  notes  was  still  large,  although  no  longer  at  its  highest  point. 
See  Comptroller'' s  Report,  1884. 

Neiv  York.  Massachusetts. 

Capital $46.2 $45.7 

Loans  and  securities  .     239 128.6 

Notes 13.2 35.8 

Individual  deposits     .     184.6 45.4 

'  The  safety  of  the  deposit  is  due  to  the  fact  that  the  check,  being 
usually  payable  *'to  order,'.'  especially  when  the  amount  is  considera- 


BANK-NOTES.  5/ 

actions  occur  on  the  largest  scale,  as  well  as  in  the 
largest  number  ;  and  it  is  in  the  cities,  therefore,  that 
the  strongest   need  is  felt  of  the  medium 
of  exchange  best  adapted  for  the  transfer  between  city 
of  great  sums.     It  is  in  the  cities,  more-      issues  and 

.    .  .  country. 

over,  that  the  condition  of  convenient 
access  to  banks,  needed  for  the  full  development  of 
the  deposit  and  check  system,  is  satisfied  in  its  high- 
est degree.  City  banks,  therefore,  on  the  whole, 
use  their  right  of  circulating  notes  but  sparingly  as 
compared  with  country  banks,  and  sometimes  prefer 
to  forego  its  use  altogether,  while  their  deposits 
attain  an  enormous  expansion.  Country  banks,  on 
the  other  hand,  dealing  on  a  smaller  scale  and  in 
communities  which  have  more  need  of  a  medium 
transferable  without  recourse  to  the  bank,  find  the 
expansion  of  their  deposits  much  restricted  in  com- 
parison with  the  circulation  of  their  notes.  It  is  for 
the  same  reason  that,  as  time  goes  on,  the  relative 
importance  of  the  bank-note  tends  generally  to 
diminish  in  comparison  with  that  of  deposits.  The 
swift  development  of  modern  commerce-  is  expand- 
ing in  high  proportion  the  field  for  the  most  con- 
venient and  efficient  medium,  while  the  transactions 
in  which  notes  find  their  use  are  growing  in  slower 
ratio.  It  becomes  more  and  more  the  business  of 
banks,  therefore,  to  extend   the  use  of  their  credit 

ble,  cannot  be  drawn  or  credited  to  its  holder  unless  endorsed  by  the 
payee.  If  lost  or  stolen,  therefore,  it  cannot  be  paid  unless  the 
bank  is  deceived  by  a  forged  endorsement,  in  which  case  the  loss  falls 
upon  the  bank  itself.  Bank-notes,  however,  being  payable  to  bearer, 
are  nearly  as  difficult  to  trace  as  money. 


58  CHAPTERS    ON    BANKING. 

in  the  form  of  deposits,  the  increase  in  their  issue  of 
notes  being,  in  the  most  progressive  communities, 
no  longer  a  matter  of  great  concern/ 

That  governments  have  so  frequently  felt  it  their 

duty    to    take  measures  for    the    protection  of   the 

holders  of  bank-notes  against  the  insolvency  of  the 

bank,  but  have  so    seldom  lee^islated  for 

Note-holders  '  ... 

protected  by  the  protection  of  depositors,  is  probably 
law,  but  not    jyg  |.Q  several  reasons.     Legislators  have 

depositors.  ^ 

generally  failed  to  perceive  the  similarity 
of  the  two  kinds  of  liability,  and  the  claim  for  equal 
consideration  which  can  be  made,  with  some  show 
of  reason,  on  behalf  of  depositors.  Moreover,  the 
appropriate  measures  for  the  protection  of  the  note- 
holders are  more  obvious  and  of  easier  application ; 
and  it  is  doubtless  true  also  that  depositors,  as  a 
class,  are  better  informed  and  can  more  easily  pro- 
tect themselves,  and  so  have  less  claim  upon  the 
sympathy  and  guardianship  of  the  legislature.  At 
all  events,  provision  for  the  safety  of  notes  is  not 
infrequently  made  by  law,  and  when  made  is  apt  to 
consist  either  of  the  easily  understood  requirement 
of  a  certain  reserve  of  cash  for  the  payment  of  the 
notes,  or  of  a  preferred  claim  to  some  portion  of 
the  assets,  allowed  to  the  holders  of  notes  in  case  a 
bank  becomes  insolvent. 

The  effect  of  provisions  for  giving  holders  of  notes 
a  preferred  claim  may  be    illustrated    easily,  if   we 

^  Compare  the  condition  of  the  State  banks  from  1834  to  1863 
with  that  of  the  national  banks  in  recent  years.  Comptroller' s 
Report^  1876,  p.  94.  See  especially  the  remarkable  development  of 
the  New  York  banks  during  the  former  period.     Ibid, ,  p.  t02. 


BANK-NOTES.  59 

take  the  statement  of  account  last  given,  and,  with- 
out any  change  of  liabilities,  suppose  the  bank  to 
have  been  led  to  make  a  change  of  investments  and 
to  diminish  its  other  assets  and  its  reserve,  until  its 
affairs  stand  as  follows : 

Liabilities.  Resources. 

Capital       .     .      $100,000  Loans     .     .     ,      $217,000 

Surplus      .     .     .     30,000  Bonds  and  stocks.    105,000 

Undivided  profits       3,150  Real  estate      .     .     15,000 

Deposits    .     .     .   187,850  Other  assets      .     .       4.000 

Notes   ....     93,925  Reserve  ....     73,925 


$414,925  $414,925 

The  liabilities  of  the  bank  are  plainly  of  two  classes : 
the  liability  to  stockholders  for  capital,  surplus  arid 
undivided  profits,  and  the  liability  to  general  credit- 
ors for  deposits  and  notes.  If  the  affairs  of  the  bank 
were  to  be  wound  up,  by  reason  of  losses,  ^^^^^  ^^ 
or  for  any  other  reason,  it  is  clear  that,  in         losses  u- 

r  1    r     •  f  ^1  lustrated, 

case  of  any  deficiency  of  resources,  the 
general  creditors  should  be  paid  first  in  full,  and  that 
only  the  residue  after  such  payment  can  be  said  to 
be  the  property  of  the  stockholders  and  divisible 
among  them.  If,  for  example,  it  proved  that,  by 
reason  of  failures  and  losses,  the  loans,  bonds,  real 
estate,  and  other  assets,  instead  of  being  worth  $341,- 
000,  which  was  their  original  value,  were  worth  only 
$225^000,  we  should  then  have  a  total  of  resources 
amounting  to  $298,925,  leaving,  after  the  payment  of 
deposits  and  notes,  only  $17,150  to  be  divided  among 
the  stockholders,  the  disaster  having  swept  away 
their  supposed  surplus,  and  more  than  four  fifths  of 
their  capital.     We  may  go  farther  and  suppose  the 


6o  CHAPTERS    ON   BANKING, 

depreciation  to  have  reduced  the  value  of  the  total 
resources  to  $250,000,  in  v/hich  case  the  creditors 
must  be  satisfied  with  a  dividend  of  a  fraction  more 
than  92  per  cent.*  and  the  stockholders  are  seen  to 
have  lost  all  that  they  had  embarked  in  the  business. 

In  these  cases  the  depositors,  holders  of  notes  and 
other  outside  creditors,  all,  in  short,  who  can  prop- 
erly be  regarded  as  creditors  in  the  settlement,  stand 
upon  the  same  footing,  one  with  another,  and  have 
similar  rights,  no  one  class  among  them  having  any 
preference  unless  by  virtue  of  some  special  legisla- 
tive provision.  .We  may  now  suppose  that  the  legis- 
lature, for  the  protection  of  the  holders  of  notes, 
has  given  them  a  right  to  be  paid  in  full  in  preference 
to  other  creditors,  if  the  assets  of  a  bank  in  liquida- 
tion should  fall  short.^  Upon  this  supposition,  from 
the  total  resources  amounting  to  $250,000,  we  should 
first  have  the  notes  paid  in  full,  amounting  to  $93,- 
925  ;  and  then  the  remaining  $156,075  would  be 
divided  among  the  depositors,  giving  them  a  divi- 
dend of  a  little  more  than  83  per  cent. 

A  provision  of  law,  then,  giving  the  holders  of  notes 
a  preferred  claim  to  the  assets  of  the  bank  would  be 
a  natural  and  easy  method  of  insuring  this  class  of 
creditors,  except  in  case  of  a  very  large  issue  or  a 
very  bad  failure.     But  we  may  suppose  the  legisla- 

'  If  we  suppose  the  law  to  make  the  stockholders  liable  as  individu- 
als for  the  debts  of  the  bank,  they  would  under  these  circumstances  be 
subject  to  an  assessment,  in  order  to  make  full  payment  to  the  de- 
positors and  note-holders..  For  the  liability  of  stock-holders  under  the 
national-bank  system  of   the    United  States,  see    Revised   Statutes^ 

§5151. 

^  E,g,,  see  New  Hampshire  Compiled  Statutes  of  18^ j,  ch.  148,  §  30. 


BANK-NOTES.  6l 

ture  to  wish  to  go  farther  than  this  and  to  give  the 
note-holders,  not  a  general  claim  in  preference  to 
others,  but  a  claim  to  specific  property  of 

111  r  1-  1  1  How    notes 

the  bank,  supposed  to  be  of  solid  value  are  secured 
and  sufficient    to  insure  payment   of  the       ^^  pledge 

■*•  of  property, 

notes  in  any  case.  Thus,  to  return  to  the 
account  on  page  59,  it  appears  that  the  bank  holds 
bonds  and  stocks  to  the  amount  of  $105,000  as  a 
part  of  its  securities.  Suppose,  then,  that  the  law 
requires  the  bank  to  hold  these  bonds  and  stocks 
pledged  to  secure  the  ultimate  payment  of  its  $93,- 
925  of  notes.  Under  such  an  arrangement,  the 
securities  would  not  cease  to  be  the  property  of  the 
bank,  and  the  earnings  of  the  securities  would  remain, 
as  before,  a  part  of  the  profits  of  the  bank.  The 
pledged  property  would  be  enjoyed,  however,  sub- 
ject to  the  provision  that,  in  case  of  the  failure  of  the 
bank,  the  proceeds  of  the  securities  should  be  ap- 
plied first  to  the  payment  of  the  outstanding  notes. 
If  the  law  should  go  farther  and  provide  that  only 
certain  approved  classes  of  securities  should  be  used 
for  this  purpose,  and  that  the  securities  pledged 
should  be  lodged  for  safe-keeping  in  the  hands  of 
some  public,  officer,  the  substance  of  the  transaction 
would  still  be  unchanged.  It  would  still  remain  a 
simple  case  of  the  specific  appropriation  of  a  certain 
part  of  the  property  of  the  bank  to  the  payment  of 
a  particular  class  of  its  liabilities  in  a  given  contin- 
gency. The  essential  structure  of  the  bank  would 
be  unchanged  and  the  sources  of  its  profits  would 
be  neither  more  nor  fewer  than  they  were  in  the 
absence  of  this  pledge  of  securities. 


62  CHAPTERS   ON   BANKING. 

The  method  described  in  this  supposed  case,  of 
protecting  the  issue  of  notes  by  a  deposit  of  securities 
as  in  the  na-  in  the  hands  of  some  pubHc  officer,  is  that 
ofThiunit'ld  which  was  adopted  by  the  State  of  New 
states,  York  in  1838,  and  was  long  known  as  the 

"free-banking"  system.  Many  other  States  fol- 
lowed the  example  of  New  York,  and  finally  in  1863 
the  New  York  plan  was  adopted  by  Congress  as  the 
basis  for  the  national-banking  system.' 

If,  now,  we  vary  the  above  supposition  so  far  as  to 
imagine  the  property  pledged  for  the  protection  of 
and  the  ^^^  notcs  to  consist,  not  wholly  of  securi- 
Bank  of  ties,  but  of  sccuritics  to  a  certain  amount 
"^  ^"  *  and  of  specie  for  all  notes  issued  in  excess 
thereof,  we  shall  have  in  substance  the  provision 
made  by  law  in  1844  for  the  protection  of  the  notes 
of  the  Bank  of  England. 

Besides  other  reasons,  already  adverted  to,  for 
seeking  legislative  protection  for  bank-notes,  the  be- 
lief has  been  common  that  banks  are  under  a  special 
and  dangerous  temptation  to  over-issue  notes,  thus 
causing  their  depreciation  with  loss  to  the  pubHc. 
The  question  whether  really  convertible  notes  can 
be  issued  in  excess  has  been  the  subject  of  much 
wearisome  and  futile  discussion,^  tending  to  secure 
for  the  notes  far  more  than  their  proper  share  of 
attention.  It  has  already  been  shown,  however,  that 
the  question  whether  notes  shall  be  issued  or  not,  is 

*  For  an  account  of  the  New  York  system  and  its  adoption  by  other 
States,  see  Comptroller  s  Report  for  1876,  pp.  23-36. 

'  For  convenient  citation^  on  thi§  subject,  see  Walker  on  Money^ 
ch.  xix. 


BANK-NOTES.  63 

one  which  in  modern  banking  is  not  settled  affirma-  ^ 
tively  by  the  bank,  but  is  settled  by  the  creditor,  I 
who  determines  for  himself  and  with  an  eye  to  his 
own  convenience,  whether  to  hold  his  right,  as> 
against  the  bank,  in  the  form  of  a  note  or  of  a  de-  v 
posit.  If  he  and  creditors  generally  prefer  the 
latter,  the  bank  cannot  force  its  notes  into  circula- 
tion. The  really  serious  question  would  be  whether/ 
the  bank  can  extend  the  use  of  its  credit,  by  de-i 
posits  as  well  as  by  notes,  in  excess.  This  is  as 
much  as  to  ask  whether  the  bank  can  go  whether 
too  far  in  the  purchase  of  securities,  or  in  extend  credit 
other  words,  can  unduly  stimulate  bor-  in  excess, 
rowers,  the  making  of  loans  being  the  purpose  for 
which  the  bank  extends  its  credit.  But  this  question 
cannot  be  answered  without  qualification.  If  we 
observe  any  period  of  ten  years,  we  shall  find  some 
years  in  which  banks  have  found  the  public  de- 
pressed and  spiritless,  to  such  a  degree  that,  with 
every  motive  for  increasing  their  business,  it  has 
been  impossible  to  find  sound  commercial  paper  in 
sufficient  amount.  So  far  from  being  able  to  extend 
their  credit  in  excess,  banks  have  at  such  times 
often  reduced  their  capital  because  employment  for 
it  could  not  be  found.  Other  years  we  shall  find  in 
which  the  public  spirit  was  buoyant  and  adventurous, 
and  in  which  the  banks  have  fostered  and  increased 
the  general  tendency  to  speculation,  by  the  facility 
with  which  they  have  given  the  use  of  their  credit. 
It  is  true  then  that  banks  cannot  extend  their  liabili- 
ties of  either  sort  except  in  response  to  a  demand 
from  the  public  ;    it    is    also  true  that    in   certain 


64  CHAPTERS    ON    BANKING. 

(states  of  business  this  demand  may  be  unduly  stimu- 
lated by  their  action,  and  that  issues  made  in  re- 
sponse to  an  unhealthy  demand  are  in  excess  of  the 
proper  needs  of  the  community.  In  any  such  ex- 
pansion of  bank  credit,  however,  bank-notes  must 
generally  play  the  least  important  part.^ 

Far  more  important,  probably,  is  the  part  played 
jby  what  is  known  as  the  certified  check.  The  check 
in  its  common  form,  under  which  it  has  been  consid- 
ered in  this  discussion,  is  simply  an  order  of  pay- 
Certified  nicnt  addrcssed  by  a  depositor  to  the  bank, 
checks  and  and  docs  not  bear  upon  its  face  any  en- 
gagement by  the  latter  to  pay.  The  bank 
is  necessarily  under  the  liability  to  pay  to  the  de- 
positor to  the  extent  to  which  he  has  funds  standing 
to  his  credit,  but  the  check  drawn  by  him  is  no  part 
of  the  evidence  of  such  liability.  If,  however,  the 
proper  officer  of  the  bank  certifies  upon  the  check 
that  it  is  good  for  the  amount  called  for  by  it,  the 
check  then  becomes  an  obligation  of  the  bank,  the 
certification  is  in  eilect  the  bank's  promise  to  pay, 
and  the  whole  transaction  becomes  indistinguishable 
in  principle  from  the  issue  of  a  bank-note.  The  cer- 
tification of  the  check  necessarily  implies  that  the 
drawer  has  funds  in  the  bank  to  the  amount  called 

^  The  condition  of  the  national  banks  in  December,  1878,  was  one 
of  great  depression,  and  may  be  compared  with  their  expanded  state 
in  October,  1890,  the  amounts  being  given  in  millions. 

December  6,  1878.     October  2,  1890. 
Capital  and  surplus      .     .     .     .         $581.3  $864. 

Loans '.  826.  1,986. 

Deposits 598.8  1,564.8 

Notes 303-3  122.9 


BANK-NOTES.  6$ 

for  and  that  they  are  appropriated  for  the  payment 
of  the  check  when  it  shall  be  presented  ;  and  in  this 
form  the  certified  check  is  safe  and  convenient  for 
many  purposes.  It  is  obviously  easy,  however,  to 
certify  the  check  as  good,  when  the  funds  to  meet  it 
are  deficient  or  are  merely  expected,  or  for  the  pur- 
pose of  giving  the  check  credit  for  some  temporary 
use,  looking  to  its  ultimate  cancellation  without 
actual  payment.  In  such  cases  the  certified  check  is 
made  the  means  of  extending  the  use  of  its  credit 
by  the  bank,  in  a  manner  pecuHarly  liable  to  abuse ; 
and  it  has  often  proved  itself  to  be  a  much  more 
efficient  instrument  for  promoting  hazardous  specula- 
tion than  any  issue  of  bank-notes  likely  to  take  place 
under  modern  conditions.* 

Of  other  actual  or  possible  forms  which  the  evi- 
dence of  the  bank's  liability  may  assume,  it  is  enough 
to  mention  here  what  is  known  as  the  post-note.l 
This  is  a  bank-note  payable  not  on  demand  but  at 
some  future  time,  probably  not  far  distant.  If  much 
resorted  to,  the  issuing  of  such  notes  would  indicate 
that  the  bank  was  borrowing  upon  time,  and  was 
probably  extending  its  business  beyond  safe  limits. 
It  is  true  that  the  Bank  of  England  m.akes  a  small 
issue  of  post-notes,  under  the  title  of  "  seven-day  " 

*  This  subject  is  discussed  among  others  in  a  valuable  report  drawn 
up  by  Mr.  Geo.  S.  Coe  and  presented  to  the  New  York  Clearing- 
House  Association,  November  ii,  1873.  Commercial  and  Financial 
Chronicle^  November  15,  1873,  p.  651.  See  the  CompU'ollers  Report 
for  1884,  p.  44,  for  the  connection  of  certified  checks  with  the 
crisis  of  that  year  in  New  York.  The  national  banks  are  forbidden 
to  certify  checks  unless  the  funds  are  actually  in  hand.  15  Statutes 
at  Large y  335  ;  22  ibid.,  166. 
5 


66  CHAPTERS    ON    BANKING. 

bills,  established  as  being  safer  for  transmission  by 
mail  than  the  ordinary  bank-notes/  In  this  country, 
however,  the  post-note  has  been  found  to  present 
peculiar  temptations  for  unsound  banking,  and  its 
use  by  the  national  banks  is  therefore  prohibited,' 
the  law  adopting  the  conservative  policy  of  requiring 
that  the  liabilities  of  the  bank,  representing  its  use 
of  credit  for  the  extension  of  its  investments,  shall 
be  cash  liabilities,  and  not  engagements  to  pay  in 
the  future. 

NOTE. 

Of  the  writers  on  banking,  McLeod,  Theory  and  Practice  of 
Banking,  has  made  the  most  careful  analysis  of  the  exchange  which 
underlies  every  banking  operation.  Notwithstanding  eccentricities 
of  method  and  style,  his  exposition  of  the  real  meaning  of  *'  loans'* 
and  the  ambiguities  incident  to  our  use  of  that  term,  the  origin  and 
purport  of  bank  liabilities,  and  the  substantial  identity  of  the  liabilities 
for  deposits  and  notes,  is  clear  and  important,  and  might  be  cited 
in  confirmation  at  many  points  in  these  pages.  Reference  may  also 
be  made  with  advantage  to  McLeod's  smaller  work,  Elements  of 
Banki?tg. 

Among  earlier  discussions,  attention  is  specially  called  to  a  strik- 
ing letter  by  James  Pennington,  in  Tooke's  History  of  Prices^  ii.,  p. 
369,  in  which  the  strong  analogy  between  the  deposit  accounts  of  the 
London  private  bankers  and  the  notes  of  the  country  bankers  is 
forcibly  stated  and  explained. 

^  Gilbart,  Principles  and  Practice  of  Bankings  p.  30. 
^  Revised  Statutes,  §  5183. 


CHAPTER  VI. 

COMBINED    RESERVES. 

It  has  been  pointed  out  in  a  preceding  chapter, 
that  in  the  management  of  its  reserve  a  bank  feels  a 
strong  conflict  of  interests.  It  is  impelled  to  increase 
its'  securities  and  to  avoid  the  keeping  of  idle  cash, 
by  the  desire  for  profit ;  it  must  also  maintain  a  re- 
serve strong  enough  to  insure  it  from  risk,  in  order 
to  secure  the  confidence  of  the  community.  In  a  pe- 
riod of  financial  disturbance  or  crisis  this  conflict  of 
interests  is  intensified,  for  the  instinct  of  self-preser- 
vation may  then  demand  the  contraction  of  loans  for 
the  replenishment  of  the  reserve,  when  a  more  far-see- 
ing judgment  would  advise  its  apparent  sacrifice  by  a 
liberal  increase  of  accommodation.  In  a  community 
where  there  is  only  one  bank,  or  where  there  is  a  sin- 
gle bank  of  great  influence,  this  difficulty  of  choice 
between  opposing  counsels  is  felt,  and  the  action 
taken  has  therefore  often  been  vacillating,  mistaken, 
or  tardy,   with   plainly  mischievous    consequences.* 

*  See,  for  example,  Bagehot's  strictures  on  the  conduct  of  the  Bank 
of  England,  Lo77ibard  Street,  pp.  178,  199  :  "A  more  miserable  cata- 
logue than  that  of  the  failures  of  the  Bank  of  England  to  keep  a  good 
banking  reserve  in  all  the  seasiijns  of  trouble  between  1825  and  1857, 
is  scarcely  to  be  found  in  history." 

67 


68  CHAPTERS   ON    BANKING. 

When,  however,  there  are  several  banks  side  by  side, 
without  any  recognized  leader  or  strong  combina- 
tion, the  difficulties  of  the  case  are  2:reatly 

When  banks     .  ,     r  ^  ^  ^  / 

not  united,      increased,  for  then  the  opposing  interests 
a  crisis  often   q£    different  banks    also  come  into   play. 

intensified.  ,  ^  . 

It  is  then  possible,  and  in  any  sharp 
crisis  is  even  probable,  that  some  of  the  bank  man- 
agers may  decide  to  take  care  of  themselves  by  re- 
ducing their  loans  and  filling  up  their  reserves,  and 
leave  it  to  others  to  take  care  of  the  general  welfare 
by  enlarging  discounts  and  satisfying  the  public 
demands.  The  knowledge  that  some  may  pursue  a 
selfish  course  weakens  the  disposition  of  others  to 
take  a  more  liberal  course,  and  thus  may  practically 
lead  the  whole  group  of  banks  to  pursue  a  policy  of 
contraction,  which  is  condemned  by  the  judgment  of 
the  majority. 

It  is  this  difficulty  of  managing  many  reserves  upon 
a  common  plan  during  a  period  of  financial  crisis, 
that  has  led  on  several  occasions  to  the  adoption  of 
an  expedient  for  combining  the  reserves  of  the  banks 
of  New  York  and  of  one  or  two  other  cities.  The 
first  occasion  on  which  this  was  done  was  at  the 
height  of  the  frightful  crisis  of  November,  i860,  when 
the  sudden  development  of  the  secession  movement 
had  destroyed  a  great  body  of  mercantile  credit,  and 
had  for  a  time  paralyzed  the  industries  of  the  whole 
Panic  of  country.  The  fifty  banks  of  New  York 
Nov.,  i860,  in  were  at  this  moment  endeavoring  each  to 
ew  ork.  ^^^^  itself,  and  the  mercantile  community, 
with  the  prospect  of  being  called  upon  for  the  re- 
payment of  loans  at  a  time  when  goods  could  not  be 


COMBINED   RESERVES.  69 

sold,  was  in  a  condition  of  panic.  Foreign  exchange 
had  become  nearly  unsalable/  and  the  efforts  of  a 
few  banks  to  start  the  wheels  of  domestic  commerce 
again,  by  buying  bills  drawn  against  shipments  of 
produce,  had  resulted  in  failure.^  It  was  necessary 
in  some  way  to  satisfy  the  alarmed  community  that 
every  solvent  debtor  could  rely  upon  having  the 
usual  facilities  for  paying  or  for  renewing  any  liabili- 
ties maturing  in  the  near  future,  and  that  he  could 
safely  shape  his  dealings  upon  that  calculation.  If 
this  were  not  done,  increased  alarm,  the  withdrawal 
of  deposits,  hoarding  of  specie,  and  forced  suspension 
of  the  banks  themselves  were  certain  to  follow.  And 
it  could  not  be  done,  except  by  such  an  agreement 
among  the  banks  as  should  insure  the  full  co-opera- 
tion of  all. 

The  New  York  banks  held  in  the  aggregate,  at  this 
frightful  juncture,  an  amount  of  specie  which  was 
equal  to  about  twenty-three  per  cent,  of  their  cash 
liabilities.  This  was  a  scanty  reserve,  but  in  the 
opinion  of  the  more  sagacious  managers  it  was  large 
enough  to  tide  over  the  present  crisis,  if  no  further 
shock  to  credit  occurred,  and  if  the  reserve  were 
treated  as  a  genuine  reserve,  to  be  used  in  pressing 
necessity,  and  not  simply  to  be  guarded.  A  liberal 
increase  of  loans  and  at  the  ^ame  time  of  liabilities 
would  make  it  still  more  scanty,  but  nevertheless  the 

^  Banker^  bills  on  London  were  quoted  at  the  equivalent  of  $4.67 
for  the  pound  sterling,  and  commercial  bills  at  $4.44»  o^"^  November 
igth,  with  few  buyers. 

2  Besides  the  daily  papers  for  November,  see  the  review  of  the 
money  market  in  the  Banker's  Magazine y  1860-61,  pp.  499»  SSQ* 


70  CHAPTERS   ON   BANKING. 

risk  was  not  overwhelming.  No  export  of  specie  was 
going  on,  and  the  solvency  of  the  banks  and  of  their 
circulation  was  under  no  suspicion.  There  was  rea- 
son indeed  to  expect  that  additional  loans,  being 
used  to  a  great  extent  in  making  such  payments  as 
fell  due  at  the  banks,  would  be  in  substance  a  mere 
exchange  of  obhgations  and  postponement  of  the 
time  for  actual  liquidation.  The  chief  difficulty  of 
the  case  was  to  secure  real  concert  of  action.  For 
accomplishing  this,  the  Clearing-House  Association, 
in  which  the  banks  were  already  united  for  impor- 
tant purposes,  and  from  which  no  bank  would  willing- 
ly find  itself  excluded,  was  the  natural  agency. 

A  plan  of  operation  was  therefore  settled  upon, 

which  should  become  binding  upon  all  the  banks  in 

the  Association,  when  adapted  by  three  fourths  of 

them.     By  this  plan  ^   the  banks  asfreed 

Plan  of  ,  r  1  r  ,1-  , 

combined  that,  for  the  purpose  of  enablmg  them  to 
expand  their  loans,  the  specie  reserves 
held  by  them  should  be  treated  as  a  com- 
mon fund  and,  if  necessary,  should  be  equalized 
among  the  banks  by  assessments  laid  upon  the 
stronger  for  the  benefit  of  the  weaker ;  and  that,  for 
the  purpose  of  settling  balances  between  the  banks, 
a  committee  should  be  appointed  with  power  to  issue 
certificates  of  deposit  to  any  bank  placing  with  them 
adequate  security  in  the  shape  of  stocks,  bonds,  or 
bills  receivable,  and  that  these  certificates  should  be 
received  in  payment  by  creditor  banks.     The  effect 

The  resolutions  of  the  banks  are  given  in  full  in  the  Banker's 
azine,  1 860-61,  p.  500,  and  also  in  the  daily  newspapers  of  No- 
vember 22,  i860.  . 


reserves 
adopted. 


COMBINED    RESERVES.  7I 

of  this  arrangement  was  that  any  bank  which  expe- 
rienced an  unusual  demand  for  specie  would  be  sup- 
ported by  the  whole  of  the  common  stock,  and  that 
the  debt  to  the  others,  which  it  thus  incurred,  could  be 
met  by  a  pledge  of  its  securities.  Whatever  course 
might  be  taken  then,  any  bank  was  as  strong  in  spe- 
cie as  any  other.  A  general  increase  of  loans  and  lia- 
bilities might  for  the  time  weake,n  all,  and  if  there 
were  a  further  loss  of  confidence  in  the  community 
might  expose  all  to  a  common  danger ;  but  no  one 
bank,  by  holding  back  its  loans,  could  strengthen  it- 
self above  the  others,  since  the  specie  which  it  might 
thus  collect  must  be  held  subject  to  assessments  for 
the  common  benefit. 

This  plan  was  adopted  November  21,  i860,  and 
under  it  certificates  were  issued  finally  amounting 
to  $10,000,000,  all  to  be  redeemed  by  February  i, 
1 861.  It  was  also  provided  that  after  that  date  any 
bank  whose  specie  fell  below  one  fourth  of  its 
liabilities  should  cease  discounting  until  that  pro- 
portion was  recovered,  under  penalty  of  expulsion 
from  the  Clearing  House.  Into  this  combination  all 
the  New  York  banks  entered,  except  the  Chemical 
Bank,  an  institution  with  remarkably  large  and 
steady  deposits  and  small  circulation,  which  pre- 
ferred to  leave  the  Clearing  House  rather  than 
throw  its  large  reserve  of  specie  into  the  common 
stock. 

The  effect  of  this  arrangement  was  instantaneous. 
The  announcement  that  it  had  been  made  quieted 
the  money-market  and  ended  the  panic.  In  the 
next  week  the  banks  increased  their  loans  rapidly, 


72  CHAPTERS   ON    BANKING. 

and  nearly  the  whole  of  the  additional  loans  went 
to  swell  the  mass  of  deposits,  with  only  an  incon- 
its  complete  siderable  loss  of  specie/  The  expansion 
success.  ^^g  continued  at  a  more  moderate  rate 

for  several  weeks  until,  under  the  natural  effect  of 
the  revuls4on  in  business,  the  demands  for  loans  fell 
off  and  specie  began  to  accumulate.  The  great 
causes  which  had  produced  the  crisis  were  still  at 
work,  and  a  general  stagnation  and  liquidation  were 
inevitable ;  but  the  combination  of  their  reserves 
had  probably  saved  the  banks  for  a  time  from  the 
suspension  of  specie  payments,  which  the  civil  war 
was  destined  to  bring  in  its  train  thirteen  months 
later.' 

Although,  however,  this  combination  was  the 
turning-point  of  the  panic  and  was  favorably  re- 
ceived by  the  general  public,  it  was  the  object  of 
much  criticism.  It  was  declared  by  many  to  be  a 
disguised  suspension  of  specie  payment,  since  the 
debts    of   the   banks  to  each  other  were  no  longer 

^  The  reported  condition  of  the  New  York  banks  for  four  weeks  was 
as  follows  (stated  in  millions) : 


Loans. 

Ci. 

rculation. 

Deposits. 

Specie. 

Nov.  10 

.      .      $125.6 

$9.5 

$79. 

$21.1 

17      . 

.      .         123.3 

9.3 

76.2 

19.5 

24      . 

.      .         122.5 

9. 

74. 

18.8 

Dec.     I 

.      .         129.5 

8.8 

80.7 

18.5 

These  figures  being  averages,  the  week  ending  November  24th 
shows  a  fall  of  loans,  although  there  was  a  heavy  expansion  in  the  last 
three  days. 

^  For  the  revival  of  this  arrangement  in  April,  1861,  and  for  the 
issue  of  certificates  and  equalization  of  specie  in  the  summer  and  fall 
of  that  year,  see  the  report  of  the  committee  in  the  Banker  s  Magom 
»He  lot  1862-63,  p.  136. 


COMBINED    RESERVES.  73 

settled  by  the  payment  of  specie,  but  by  a  pledge 
of  securities.  But  it  was  answered  triumphantly  by 
the  bank  managers,  that  the  power  of  the  public  to 
obtain  in  specie  the  payment  of  deposits  or  the 
redemption  of  notes  remained  unimpaired.  So  long 
as  the  convertibility  of  the  bank-note  was  main- 
tained, how  could  it  be  said  that  specie  payments 
were  even  virtually  suspended,  although  the  banks 
should  mutually  forbear  to  demand  specie  from 
each  other  ?  The  arrangement  was  in  fact  a  tem* 
porary  fusion  of  the  fifty  banks  of  the  city  in  their 
relations  to  each  other,  but  without  prejudice  to  any 
of  the  rights  of  the  public.  y 

The  general  crisis  of  1873  had  its  beginning  in 
New  York,  with  some  important  failures,  on  the  8th 
of  September.  It  developed  rapidly,  and  by  the 
1 8th  a  panic  had  set  in,  which  was  heightened  in  the 
next  two  days  by  several  serious  failures  of  banks 
and  banking  houses,  and  by  the  rapid  withdrawal  of 
balances  by  country  banks  and  other  depositors. 
The  pressure  to  realize  upon  stocks,  and  the  conse- 
quent excitement  in  the  market  became  so  intense 
that  on  the  20th  the  Stock  Exchange  was  closed  for 
ten  days.  The  sale  of  foreign  exchange  drawn 
against  exported  merchandise  was  soon  completely 
blocked,  and  the  Treasury  was  at  last  urged  by 
many,  with  little  regard  for  its  limited  authority,  to 
use  its  funds  in  the  purchase  of  bills.^     The  banks, 

^  Some  of  the  correspondence  on  this  subject  was  given  by  the 
Secretary  of  the  Treasury  in  the  Finance  Report  for  1873,  p.  13.  See 
also  New  York  Times,  September  26th. 


74  CHAPTERS   ON   BANKING. 

in  this  state  of  affairs,  acted  with  little  promptness. 
Whether  they  could  have  stayed  the  progress  of  a 
panic,  which  was,  in  fact,  the  awakening  from  an 
intoxicating  speculation,  may  be  doubted.  At  any 
rate,  it  was  not  until  the  evening  of  Saturday,  Sep- 
tember 20th,  that  they  determined  upon  an  issue  of 
Clearinor-House    loan    certificates    to    the 

The  same  ^ 

plan  followed  amount  of  $10,000,000,  and  agreed  to 
in  Sept.,  1873.  gq^^jj^e  their  reserves  by  assessment,  if 
necessary.*  The  fact  that  specie  payment  had  been 
suspended  since  the  close  of  1861  did  not  materially 
change  the  problem  with  which  they  had  to  deal ; 
and  they  accordingly  adopted  the  same  votes  as  in 
i860,  with  few  changes,  except  the  phrases  needed 
to  recognize  the  fact  that  their  liabilities  now  im- 
ported the  obligation  to  pay  in  ^*  lawful  money " 
only,  and  not  in  specie. 

This  measure,  however,  proved  to  be  unavailing. 
The  shock  which  had  been  given  to  confidence  was 
too  severe  and  too  general,  the  drain  upon  city 
banks  by  the  demand  of  country  corresponding 
banks  strengthened,  and  legal-tender  notes  rapidly 
disappeared  from  the  reserves.  In  the  effort  to 
withstand  this  movement,  the  banks,  on  Wednes- 
day, the  24th,  increased  the  issue  of  loan  certificates 
to  $20,000,000.     On  the  same  day,  however,  it  was 

^  The  votes  adopted  by  the  banks  are  given  by  the  Comptroller  of 
the  Currency,  Finance  Report  for  1873,  p.  90  ;  and  in  the  Commer- 
cial and  Financial  Chronicle^  September  27,  1873,  p.  410. 

For  the  amQunt-  of  certificates  issued  in  1873,  see  Report  of  the 
Comptroller  of  the  Currency  for  1884,  p.  38. 

That  the  legal  tenders  were  equalized  for  the  first  time  on  the  25th, 
see  New  York  TimeSy  September  26th. 


COMBINED   RESERVES.  75 

reported  that  in  many  cases  the  payment  of  checks 
calling  for  legal  tender  in  large  amounts 
was  refuseid/  and  this  proved  to  be  the  nevertheless 
beginning  of  a  suspension  of  payments,  ^o^o^ed. 
which,  in  a  day  or  two,  became  general  throughout 
the  country,  and  lasted  until  November  ist."  The 
banks  continued  to  meet  at  the  Clearing  House  and 
to  settle  their  demands  against  each  other  by  means 
of  certificates,  and  payments  were  made  as  usual  by 
checks,  in  cases  where  these  could  be  deposited  by 
the  payee  and  so  could  pass  through  the  Clearing 
House.  The  necessities  of  depositors  having  large 
payments  of  wages  to  make  were  often  met  by 
payment  in  legal  tender,  and  also  many  of  the  small 
checks  required  by  the  necessities  of  every-day  life 
were  so  paid.  This,  however,  was  by  favor,  and  it 
still  remained  true  that  for  most  purposes  payment 
upon  demand  by  the  banks  had  stopped.  The  re- 
serves, which  had  shrunk  rapidly  down  to  the 
suspension,  continued  to  decline  until  they  reached 
their  lowest  point  October  13th,'  when,  in  the  gen- 
eral stagnation  of  business,  the  banks  began  to 
regain   their   strength    by   a   natural   process. 

In  May,  1884,  the  banks  of  New  York  again  found 
themselves  confrc^ited  by  a  rapidly  developing 
crisis.     An  uneasy  feeling  had   prevailed   from  the 

^  New  York  Times,  September  25,  1873. 

^  See  statement  by  the  Comptroller  of  the  Currency,  Finance  Re- 
port for  1873,  p.  91. 

'  The  weekly  publication  of  the  returns  made  by  the  banks  to  the 
Clearing  House  was  discontinued  during  the  suspension  of  payments, 
but  the  Comptroller  of  the  Currency,  Finance  Report  iox  1873,  p. 


*]&  CHAPTERS   ON   BANKING. 

beginning  of  the  year,  and  failures,  loss  of  confidence, 
and  decline  of  prices  had  strongly  marked  the  spring 
months.  Some  apprehension  that  the  United  States 
Treasury  might  find  it  necessary  to  resort  to  pay- 
ment in  silver  had  also  disquieted  the  public,  and  led 
to  a  serious  withdrawal  of  deposits,  which  left  the 
banks  but  ill  prepared  for  any  severe  strain.*  Oa 
May  6th  the  Marine  National  Bank  failed,  under  cir- 
cumstances of  extraordinary  dishonor ;  on  the  13th 
the  Second  National  Bank  of  New  York  disclosed  an 
immense  defalcation  by  its  president,  and  on  the 
next  day  the  Metropolitan  National  Bank  and  sev- 
eral important  private  firms  suspended.  This  was 
the  signal  for  action  by  the  associated  banks,  and- 
they  accordingly  on  the  same  day.  May  14th,  adopted 
The  Ian  ^^^  ^^^  third  time  the  plan  of  settling 
succeeds  in  their  balances  with  each  other  by  means 
May,  1884.  ^£  certificates  of  deposit,  and  this  time 
without  limiting  the  amount  to  be  issued.  They  did 
not  deem  it  necessary  to  adopt  the  further  provision 
of  the  plan  of  i860  and  1873,  for  equalizing  reserves 
by  assessments  in  case  of  need.     That  provision  was 

95,  gives  the  following  comparison  for  the  national  banks  of  New 

York  (stated  in  millions)  : 

Sept.  12.  Oct.  13.  Nov.  I. 

Loans     ......     $199.2        $179.1        $169.2 

Deposits 100.  89.7  92.6 

Due  to  banks   ....         72.6  38.8  36.9 

Circulation        ....         27.5  27.8  27.8 

Legal  tender     ....         32.3  6.5  15.7 

Specie 14.6  10.  11.5' 

See  also  Finance  Report  for  1874,  p.  170,  for  weekly  average  lia- 
bilities and  reserves  of  the  same  banks  for  September  and  October, 
1870-74. 

*  Some  instructive  comments  as  to  the  course  of  affairs  earlier  in  the 
year  are  made  by  the  Commercial  and  Financial  Chronicle^  May  31, 
1884,  p.  632.     See  the  table  in  the  note  on  p.  77. 


COMBINED    RESERVES.  7/ 

framed,  it  is  probable,  to  guard  against  that  kind  of 
discredit  which  finds  its  expression  in  a  "  run  "  upon 
particular  banks,  by  depositors  or  noteholders,  such 
as  was  seen  in  the  panic  of  1857  5  t)ut  although  such 
a  contingency  is  never  impossible,  it  no  doubt  now 
appears  far  more  remote  than  formerly,  since  the 
ability  to  meet  the  Clearing-House  settlement  is  ac- 
cepted by  the  public,  as  well  as  by  the  banks  them- 
selves, as  the  sufficient  guaranty  of  solvency.  And 
the  simple  resort  to  the  issue  of  certificates  proved 
in  1884  to  be  sufficient  for  the  purpose,  being 
resorted  to  before  the  situation  had  become  too  des- 
perate.* It  quieted  the  apprehensions  of  the  public  " 
and  enabled  the  banks,  although  contracting  their 
loans  in  general,  to  give  assistance  with  confidence 
when  it  could  be  given  legitimately.  The  process  of 
liquidation,  with  diminishing  loans  and  deposits, 
went  on  for  some  weeks,  the  reserves  of  the  banks 
fell  below  the  legal  minimum,  but  the  stress  of  the 
crisis  was  passed  by  the  general  public  in  safety. 

The  severe  crisis  of  November,   1890,  compelled 
the  New  York  banks  for  the  fourth  time  to  combine 

^  The  average  condition  of  banks  of  the  New  York  Clearing  House, 
for  a  series  of  weeks,  was  as  follows  (stated  in  millions)  : 


Loans. 

Circulation. 

Deposits. 

Reserve. 

February  16 

.      I345.9 

$14.5 

$363.5 

$110.9 

April  26      . 

.         343.4 

14.5 

335.7 

86.3 

May    3 

.         342. . 

14.4 

333.2 

84.1 

"     10 

.         333.4 

14.2 

329.8 

86.9 

"     17       . 

.         326.6 

14.2 

317.2 

82.4 

"     24       . 

.         313.2 

14.3 

296.6 

67.5 

The  vote  adopted  by  the  banks  of  New  York  is  given  by  the  daily 
newspapers  of  the  date,  and  also  by  the  Comptroller  of  the  Currency 
in  his  Report  for  1884,  p.  33.  On  p.  37  is  a  statement  as  to  the 
amount  of  certificates  actually  issued  in  1884. 


78  CHAPTERS   ON    BANKING. 

their  reserves  for  general  defence,  by  the  resort  to 
loan  certificates.  A  long-continued  fall  in  prices  at 
the  stock  exchange,  the  unexplained  alarm  shown  in 
the  London  market,  and  the  low  state  of  reserves, 
had  finally,  at  the  beginning  of  the  second  week  of 
November,  resulted  in  a  dangerous  collapse  of  prices 
and  in  several  failures  and  the  notorious  embarrass- 
ment of  two  or  three  banks.  The  banks  voted  the 
Again  issue  of  Certificates  on  the  afternoon  of 

succeeds  in  Tucsday  the  nth,  again  without  limit  of 
ov.,  I  go.  ^^^  amount,  with  the  effect  of  a  consider- 
able  recovery  in  tone  by  the  general  public  on  the 
next  day.  The  week  was  marked  by  a  train  of  disas- 
ters, culminating  on  Saturday  with  the  news  that 
the  old  house  of  Baring  Brothers  had  gone  into 
liquidation.  The  crisis  was  safely  passed,  however, 
without  the  development  of  panic.  Fresh  loans  were 
not  to  be  had,  in  the  general  pressure,  but  renewals 
were  made  freely,  and  by  the  end  of  the  year  the 
business  community  found  itself  in  comparative  safe- 
ty, tided  over  a  complication  of  financial  misfortune 
which  at  times  had  appeared  nearly  hopefess.* 

^  The  average  condition  of  the  New  York  banks,  for  a  series  of 
weeks,  was  as  follows  (stated  in  millions) : 

Reserve. 

$100.5 

99.8 

95.5 

95.8 

95.5 

95. 

94.8 

Some  particulars  as  to  the  amount  and  form  of  the  certificates 
issued  on  this  occasion  are  given  by  the  Commercial  and  Financial 
Chronicle,  Jan,  3,  1891,  p.  17. 


Loans. 

Circulation. 

Deposits. 

Oct. 

18 

.      I406.I 

$3.5 

$403.5 

Nov. 

I     . 

.         399.8 

3.5 

396.3 

4( 

8 

.         398-9 

3.5 

392.3 

** 

15 

.         393.3 

3.5 

386.6 

(( 

22 

.        387.3 

3.6 

381.7 

(i 

29 

.         384.5 

3.5 

376.9 

Dec. 

13 

.      .        386. 

3.6 

^l^'l 

COMBINED   RESERVES.  79 

The  banks  of  Boston  have  usually  followed  the 
example  of  those  in  New  York,  with  such  changes 
of  method  as  their  special  needs  seemed  to  advise. 
In  November,  i860,  a  proposition  was  made  in 
the  Boston  Clearing  House  to  adopt  the  New 
York  plan  without  change,  but  after  much  debate 
this  was  rejected,  and  it  was  voted,  on  the  24th,  that 
any  bank  owing  a  balance  at  the  Clearing  House 
might  pay  in  its  own  notes  to  the  extentf^of  fifty  per 
cent,  of  the  balance  due,  provided  the  amount  of 
notes  did  not  exceed  a  certain  proportion  of  the  cap- 
ital of  the  bank,  varying  from  one  tenth  for  the 
smaller  banks  to  one  twentieth  for  the  largest.^  The 
expedient  of  making  a  common  fund  of  specie  was 
rejected,  and  on  the  whole  the  Boston  banks  failed 
to  secure  satisfactory  unanimity  of  action.  They 
passed  through  the  crisis,  however,  without  suspen- 
sion, with  the  aid,  it  was  said,  of  some  forbearance 
by  creditor  banks  in  New  York.  In  1873  the  Boston 
banks  voted,  September  27th,  to  suspend  currency 
payments  in  consequence  of  the  suspension  in  New 
York,  and  also  to  issue  loan  certificates,  for  use 
at  the  Clearing  House,  to  the  amount  of  $10,000,000, 
"  upon  substantially  the  same  basis  as  issued  by  the 
banks  in  New  York  City.'*  In  this  case  also  they  did 
not  adopt  the  method  of  equalizing  reserves  by 
assessment."  In  1890  the  Boston  banks,  November 
17th,  determined  upon  the  issue  of  loan  certificates 
without  limit  as  to  amount,  but  bearing  the  high  in- 
terest of  7y3^  per  cent. 

^  Boston  Daily  Advertiser,  November  26,  i860. 
^  Ibid.,  September  29,  1873. 


So  CHAPTERS    ON    BANKING. 

It  IS  clear  that  the  dangers  from  which  the  banks 
of  New  York  and  Boston  have  sought  to  escape  by 
this  repeated  resort  to  temporary  combination  are 
inherent  in  a  many-reserve  system.  High  authority 
has  pronounced  such  a  system  to  be  the  natural  one 
and  presumably  the  best,  in  itself  considered.^  But 
it  is  clear  that,  in  banking,  '*  a  republic  with  many 
competitors  "  means  not  merely  a  divided  responsi- 
bility, but  at  times  the  probability  that  required 
action  will  be  impossible,  unless  some  means  are 
found  of  securing  uniformity  at  the  expense,  of  indi- 
vidual independence, — in  other  words,  some  means  of 
practically  converting  many  reserves  into  one  reserve, 
under  a  common  authority,  for  the  time  being. 
With  many  reserves,  the  banks  of  a  community  like 
New  York,  managing  each  for  itself,  traverse  with 
ease  and  profit  the  period  of  rising  confidence  and 
general  expansion.  They  combine  their  reserves  in 
effect,  by  enabling  each  to  convert  its  securities  into 
the  equivalent  of  cash  at  the  Clearing  House,  when 
the  critical  moment  of  alarm  and  revulsion  comes. 
At  that  moment,  it  appears,  the  confidence  of  the 
public  is  best  secured  by  showing  that  the  natural 
system  is  for  a  time  superseded  by  something  not 
unlike  a  vast  consolidation. 

This  combination  is  sometimes  timely  and  suc- 
cessful, as  in  i860  and  1884,  and  sometimes  tardy 
and  unsuccessful,  as  in  1873.  But  inasmuch  as  its 
effects  under  proper  conditions  are  well  recognized, 
it  is  sometimes  suggested  that  some  such  system 
should  be   made  permanent.     Why  not  have  relief 

'  Bagehot,  Lombard  Street^  page  67. 


COMBINED    RESERVES.  8l 

all  the  time,  it  is  asked,  instead  of  occasionally? 
The  answer  to  this  question  must  be,  that  what  is 
effective  by  way  of  relief  is  not  necessarily  salutary  as 
a  regular  system.  The  relief  in  this  case  The  system 
comes  from  the  fact  that,  under  the  arrange-  "°pj|.mlnent 
ment  for  combined  reserves,  every  bank  use. 

is  for  a  time  completely  discharged  from  any  real 
sense  of  responsibility  for  cautious  action.  Slight 
as  its  share  of  responsibility  may  be  under  ordinary 
circumstances,  under  this  arrangement  it  is  free  to 
expand,  or  to  neglect  ordinary  precautions,  at  pleas- 
ure ;  the  arrangement  is  entered  into  for  the  precise 
object  of  thus  setting  it  free,  and  it  is  in  the  pubhc 
knowledge  of  this  fact  that  the  virtue  of  the  arrange- 
ment consists.  But,  under  ordinary  circumstances, 
it  is  not  in  any  diminished  sense  of  responsibility 
that  the  way  to  sound  banking  and  to  the  ultimate 
good  of  the  whole  community  is  to  be  found.  On 
the  contrary,  the  problem,  both  in  legislation  and  in 
theoretical  discussion,  now  is,  how  to  bring  the  sense 
of  public  duty  in  the  management  of  private  inter- 
ests to  the  aid  of  the  legal  provisions  by  which 
bankers  are  hedged  about. 


.  CHAPTER  VII. 

THE   BANK   OF   AMSTERDAM. 

The  sixteenth,  seventeenth,  and  eighteenth  cen- 
turies give  many  examples  of  a  class  of  establish- 
ments performing  some  of  the  functions  of  banks 
and  playing  a  great  part  in  the  commercial  history 
of  their  time,  and  yet  answering  imperfectly  to  the 
modern  definition  of  a  bank.  Of  these,  the  Bank  of 
Venice  and  the  Bank  of  Amsterdam  were  in  their 
day  the  most  celebrated,  and  the  Bank  of  Hamburg 
was  the  last  to  disappear.  As  a  type  of  the  class  the 
Bank  of  Amsterdam  has  perhaps  a  better  claim  upon 
our  attention  than  any  other. 

At  the  close  of  the  sixteenth  century  the  com- 
merce of  Holland  had  already  taken  such  a  form  as 
to  make  Amsterdam  a  leading  city  in  international 
dealings.  Foreigners  found  there  the  supplies  of 
Amsterdam  g^^ds  brought  in  by  the  Dutch  from  all 
a  centre  of  parts  of  Europc  and  from  the  East 
Indies,  and  specie  flowed  in  abundantly 
in  payment  for  goods  and  for  the  services  of  the 
Dutch  shipping.  This  strearn  of  payments  often 
made  it  convenient  to  settle  other  transactions  also 
through  Amsterdam  as  a  financial  centre,  and  thus 


THE   BANK   OF   AMSTERDAM.  83 

both  the  variety  and  the  amount  of  the  bills  of 
exchange,  coming  into  the  Amsterdam  market  for 
payment  or  for  sale,  rapidly  increased.  Such  a 
concentration  of  dealings  in  money  could  not  fail  to 
develop  some  of  the  convenient  practices  of  banking. 
Individuals  began  to  deal  in  foreign  exchange  and  to 
buy  and  sell  coin  and  bullion ;  and,  sometimes  in 
connection  with  the  exchange  business  and  some- 
times independently  of  it,  began  to  receive  money 
on  deposit,  and  to  effect  payments,  when  ordered  by 
customers,  by  transfer  from  one  account  to  another. 
That  with  these  dealings  the  business  of  lending  was 
also  carried  on  follows  almost  as  a  matter  of  course,  so 
that  it  is  probable  that  by  the  end  of  the  sixteenth 
century  the  issue  of  notes  was  alone  wanting  to 
make  the  development  of  private  banking  in  Am- 
sterdam complete. 

The  currency  used  in  these  transactions  was  the 
multifarious  coinage  of  the  Dutch  provinces  and 
cities,  and  the  great  variety  of  coins  brought  in  from 
all  parts  of  the  commercial  world  in  the  regular 
course  of  payments.  The  standard  coin  ^j^^  currency 
in  use  was  the  Netherlands  riksdaler,  but  confused  and 
no  small  part  of  the  specie  in  actual  cir-  ^^^^^^^  * 
culation,  even  of  the  riksdalers,  was  below  its  legal 
weight,  either  from  wear,  ill  usage,  or  irregularity  in 
coinage.*     Coins  of  full  weight  tended  to  disappear, 

^  Adam  Smith,  Wealth  of  Nations,  Book  IV.,  ch.  iii.,  **  Digression 
Concerning  Banks  of  Deposit,"  gives  a  brief  account  of  the  condition 
of  the  currency  of  Amsterdam  at  this  time.  Sir  James  Steuayt, 
Principles  of  Political  EconoMy,  ii.,  p.  78,  devotes  a  chapter  to  a 
minute  but  difficult  account  of  the  Dutch  coinage. 

The  Netherlands  riksdaler,  frora  1606,  contained  528^^  azen  of  fine 


84  CHAPTERS   ON   BANKING. 

except  when  a  premium  paid  in  the  light  coin  of 
every-day  use  brought  them  out.  The  confusion 
which  resulted  from  this  state  of  things  extended  to 
foreign  exchange  as  well  as  to  domestic  trade,  and 
some  cure  for  it  was  felt  to  be  necessary  for  the 
solid  prosperity  of  the  city.  The  cause  of  the  diffi- 
culty was  so  little  understood,  however,  that  the  city 
administration  did  not  look  to  the  restoration  of  the 
local  coinage  to  sound  condition  for  a  remedy.  They 
formed  the  opinion  that  the  bad  condition  of  the 
current  money  was  due  to  the  practices  of  the  dealers 
in  specie,  and  that  the  heavier  coins  were  driven  out 
by  the  increasing  use  of  bills  of  exchange  as  a  sub- 
stitute for  money.  The  first  action  taken  then  was 
directed  against  the  deposit  bankers  and  dealers  in 
specie  and  exchange. 

More  than  one  effort  had  been  made  to  restrict 
and  regulate  the  dealings  of  these  persons,  when  in 
1608  the  rise  of  the  premium  on  some  kinds  of  heavy 
money  to  nine  per  cent,  stimulated  the  administra- 
tion to  extreme  measures.  By  the  statute  of  July 
15,  1608,  the  business  of  deposit-holding  was  abso- 
lutely prohibited,  and  the  receiving  or  paying  out  of 
money  for  another  person,  or  its  transfer  by  writing 
or  by  word  of  mouth,  directly  or  indirectly,  was  for- 
bidden under  a  penalty  of  twenty-five  per  cent.,  one 
half  to  be  levied  upon  the   banker,  and    the   other 

silver,  or  nearly  392  grains  Troy,  being  equal  in  contents  to  about 
$1.05^  of  American  standard  silver.  The  gulden  was  only  a  money 
of  account  previous  to  1681,  the  riksdaler  being  rated  at  2|  gulden 
from  1608  to  1622,  and  from  this  date  at  2  J  gulden.  The  gulden  con- 
tained 20  stuyvers. 


THE    BANK   OF   AMSTERDAM.  8$ 

upon  the  customer.  The  use  of  bills  of  exchange  or 
assignments  in  making  payment  was  forbidden,  and 
every  one  was  charged  to  make  and  receive  payments 
of  his  own  debts  or  credits,  by  himself  or  his  agents. 
And  finally  all  were  admonished  neither  to  give  nor 
take  any  description  of  money  at  a  higher  rate  than 
that  fixed  by  the  States-General,  and  not  to  cull  the 
heavy  coin  from  the  lighter  in  order  to  make  a  profit/ 
Upon  the  demand  of  merchants  it  was  found  neces- 
sary, a  fortnight  later,  to  moderate  some  of  these 
provisions  slightly,  but  even  then  the  measure  showed 
plainly  the  opinion  of  the  administration,  that  private 
speculation  and  an  extended  use  of  credit  were  re- 
sponsible for  the  bad  condition  of  the  local  currency. 
The  substitution  of  direct  payments  for  the  con- 
venient mode  of  dealing  through  cash-keepers  or 
bankers,  however,  was  intended  to  be,  and  was  in 
fact,  only  a  temporary  measure.  The  city  adminis- 
tration had  for  two  years  been  maturing  a  plan  for  a 
great    establishment,    which    should    con- 

The  Wissel- 

centrate  under  public  authority  the  whole  bank 

business  of  keeping:  assignable  deposits  of     established 

U  J         f      4       r  •  •  J     .U-         by  the  city. 

cash    and    of   dealmg  m  specie,    and    this 
scheme  was  finally  put  into   operation  by    the  city 
ordinance  of  January  31,  1609,   which  created    the 
Amsterdamsche    Wisselbank,     or    Exchange    bank, 
since  known  as  the  Bank  of  Amsterdam.^ 

^  The  text  of  this  remarkable  act  is  given  by  Mees,  in  his  excellent 
history  of  the  Bank  of  Amsterdam,  Proeve  eener  Geschiedenis  van 
het  Bankzvezen  in  Nederland^  gedurende  den  tijd  der  Republiek^  door 
W.  C.  Mees  [formerly  President  of  the  Bank  of  the  Netherlands]. 
Rotterdam,  1838  ;  pp.  351.     See  p.  279. 

•  The  ordinance  is  given  by  Mees,  Bankwezen,  p.'  283. 


86  CHAPTERS   ON   BANKING. 

The  provisions  of  this  ordinance  were  simple.      It 
provided  that    any   person    might   bring  money  or 
bullion  for  deposit  and  might  withdraw  at  pleasure  (; 
the  money  or  the  worth  of  the  bullion,  provided  that^ 
deposits  should  not  be  made  of  less  than  300  gulden 
in  amount  and  should  not  include  more  than  three  per 
cent,  of  small  silver.     The  bank  was  also  required  to  n 
sell  any  kind  of  specie  demanded   of  it,  at  as  low  a  ^ 
premium  as  possible.     Deposits  payable  upon  de- 
mand having  been  provided  for  and  made  transfer- 
able, the  ordinance  then   required  that  all  bills  oi  f^ 
exchange  of  600  gulden  or  upwards  *  should  be  paid  (J 
through  the  bank,  or  in  other  words,  by  the  transfer 
of  deposits  or  credits  in  bank.     Deposits  were  ex- 
empted   from    seizure   by   process   of    law,    and   a 
commission  of  -^^  of  one  per  cent,  on  the  amount 
deposited  or  paid  out  was  prescribed  to  be  paid  to 
the  bank.     By  a  natural  usage,  the  transferable  de- 
posits  or  credits  soon  came  to  be  known  as  **  bank 
money,**  and  were  so  called  throughout  the  history 
of  the  bank. 

The  purpose  of  this  ordinance  was  advanced  still 
further  by  a  statute  of  No^^pfer  30,  1609,  provid- 
ing for  the  appointment  o^rotside  receivers  for  the 
bank,  who  should  be  authorized,  for  the  convenience 
of  the  public,  to  receive  deposits  and  payments  at 
their  offices,  sums  so  received  to  be  paid  over  to 
the  owner  or  carried  to  his  credit  at  the  bank  within 
three  days.  No  assignments  could  be  made  on  the 
books  of  the  receivers,  however ;  they  were  forbid- 

^  In  1643  this  limit  was  lowered  to  300  gulden.  Mees,  Bank' 
wezeUf  p.  114. 


THE   BANK   OF  AMSTERDAM.  8/ 

den  to  take  or  pay  out  any  kind  of  specie  at  a 
different  rate  from  that  established  by  the  States- 
General,  or  to  deal  in  any  kind  of  specie  for  profit ; 
and  provision  was  made  for  their  compensation  by  a 
commission  on  deposits  and  payments.  The  receiv- 
ing or  paying  out  of  money  for  others  by  private 
cashiers,  even  within  the  narrow  limits  finally  con- 
ceded in  the  summer  of  1608,  was  strictly  forbidden, 
and  thus  the  greater  part  of  the  business  of  banking 
and  dealing  in  money  and  exchange,  so  far  as  it  was 
yet  developed,  was  concentrated  by  law  in  the  hands 
of  the  bank  and  of  its  receiving  agents. 

The  advantages  offered  by  the  bank  as  thus 
organized  were  those  of  a  secure  sygtem  of  deposit 
and  a  fixed  standard  of  payments.  It  used  its 
credit  in  no  way  to  displace  the  specie  currency  of 
the  city,  but  only  as  a  representative  of  so  much  of 
that  currency  as  might  be  present  in  its  j.^^  deposits 
vaults,  by  promising  to  pay  deposits  to  become  a 
the  owners  or  their  assignees.  As  the  currency, 
bank  received  deposits  only  as  valued  in  money 
of  full  weight  and  paid  out  such  money  only,  the 
value  of  a  credit  upon  its  books  was  the  same 
as  that  of  good  coin,  varying  at  times  seriously 
from  the  average  value  of  the  degraded  medium  in 
common  use,  but  after  all  representing  only  what 
the  average  value  should  have  been.  The  value  of 
the  deposit  was  made  certain  then,  except  in  the 
case  of  a  possible  alteration  of  the  mint  standard 
by  the  government.*     Payments  between  individuals 

*  Changes  in  the  value  of  the  gulden  banco  were  thus  made  in 
1622,   1645,   and   1654,   which  progressively  lowered   the   standard, 


88  CHAPTERS   ON   BANKING. 

by  the  transfer  from  the  deposit  account  of  one 
person  to  the  account  of  another,  or  in  other  words, 
payments  in  bank  money,  were  a  chief  function  of 
the  bank  from  the  start.  These  transfers  appear 
to  have  been  made  at  every  period  of  the  bank*s 
history  by  means  of  an  order,  presented  by  the  payer 
in  person  or  by  his  usual  authorized  agent,  and  not 
available  by  the  payee  until  the  next  day,  and  thus 
many  of  the  conveniences  secured  by  the  modern 
use  of  the  check  were  missed/  Still,  in  the  more 
deliberate  movement  of  the  seventeenth  and  eigh- 
teenth centuries,  the  activity  even  of  deposits  trans- 
ferred in  person  made  these  a  valuable  part  of  the 
commercial  machinery  of  the  cities  using  them. 

The  establishment  of  such  a  bank  of  deposit  then, 
and  the  requirement  that  bills  of  exchange  when 
negotiated  or  maturing  should  be  settled  for  by 
transfers  in  bank,  had  the  great  advantage  of  freeing 
the  important  transactions  of  merchants,  and  espe- 
cially their  foreign  dealings,  from  all  risk  of  confu- 
sion or  uncertainty  arising  from  the  bad  condition 
of  the  current  money.  Some  of  the  consequences 
of  an  evil,  with  which  the  state  was  not  ready  to 
cope  directly,  were  thus  avoided  with  great  success. 
Venice  had  had  the  same  evil  to  deal  with  and  had 
met  it  in  1587  by  establishing  the  Banco  di  Rialto, 
the  forerunner  of  the  more  famous  Banco  del  Giro, 

leaving  the  gulden  banco  at  a  premium,  however,  which  represented 
the  difference  between  the  mint  standard  for  the  time  being  and  the 
coin  in  actual  use. 

^  As  to  the  method  of  transfer  see  Ricard,  Traits  GMral  du 
Commerce  (edition  of  1 781),  i,,  p.  77. 


THE   BANK   OF   AMSTERDAM.  89 

seeking  to  concentrate  all  deposits  and  all  dealings 
in  exchange  in  a  single  bank  controlled  by  the  gov- 
ernment. It  is  not  to  be  assumed,  however,  that 
Amsterdam,  twenty-two  years  later,  was  in  any  true 
sense  indebted  to  Venice  for  the  idea  upon  which 
she  acted.  Both  cities  adopted  banking  practices 
w^hich  private  persons  had  long  since  evolved,  and 
both  took  the  obvious  method  of  seeking  to  manage, 
by  public  authority,  branches  of  business  which  it 
was  believed  were  managed  ill  by  individuals. 

It  is  obvious  from  what  has  been  said  above,  that 
whatever  difference  of  value  between  the  deposit 
accounts  of  the  bank  and  the  money  in  ordinary 
circulation  may  have  been  observed  in  the  t,.  ^  „^ .„_ 

J  Tne  premium 

earlief  days  of  the  bank,  could  only  have  upon  the 
been  the  difference  between  the  money  of  ^"  "^oney. 
full  w^eight  received  and  paid  out  by  the  bank  and 
the  average  coin  in  circulation.  So  long  as  the  bank 
received  deposits  freely  from  all  comers  and  paid 
depositors  on  demand,  no  convenience  arising  from 
the  use  of  deposit  accounts  in  payments,  or  sense  of 
security  on  the  part  of  depositors,  or  obligatory  use 
of  deposit  accounts  in  settlement  of  bills  of  ex- 
change,* could  cause  any  thing  more  than  a  transient 
fluctuation  in  the  value  of  bank  money  above  or 
below  the  specie  standard.  But  the  specie  used  by 
the  bank  as  its  standard  tended  to  become  scarce. 

*  Serionne,  Richesse  de  la  Hollande,  i.,  p.  154,  declares  that  the 
provision  as  to  bills  of  exchange  was  not  observed  (1778),  being  "  in- 
executable."  **  Tons  les  jours  on  voit  a  Amsterdam  nombre  de  lettres 
de  change  paye'es  hors  de  la  banque,  I'agio  etant  regie  suivant  le 
cours."     See  also  Mees,  Bankwezen,  p.  115. 


90  CHAPTERS   ON   BANKING. 

**  Bankable  "  money,  or,  as  it  came  to  be  called,  '^  bank 
specie,**  was  at  the  beginning  the  heavy  Netherlands 
riksdaler  of  silver,  of  which  the  value  in  receipts  and 
payments  at  the  bank  was  expressed  in  gulden,  ac- 
cording to  the  legal  standard  of  weight.  But  from 
the  beginning  the  gulden  of  account  at  the  bank, 
being  a  fixed  part  of  the  heavy  riksdaler,  stood  at  a 
premium  as  compared  with  the  light  coin  in  every- 
day use  ;  and  even  after  the  alteration  of  the  nominal 
weight  of  the  gulden  in  1622,  the  gulden  banco  bore 
a  premium  of  over  four  per  cent.  Other  changes 
in  the  mint  weight  followed  in  that  century.  The 
heavy  riksdalers,  the  chief  bank  specie  of  the  earlier " 
days,  became  so  scarce  that  from  time  to  time  notice 
had  to  be  given  that  other  coins,  if  of  full  weight, 
would  be  received  as  good  bank  specie  at  a  fixed  rate 
,  measured  in  gulden,  and  paid  out  at  the  same.  Still 
the  premium  on  bank  money  marked  in  the  same 
way  the  difference  between  it  and  the  deteriorated 
coin  in  common  circulation. 

It  is  clear  that  the  original  theory  of  the  bank  as 
^  bank  of  deposit  did  not  contemplate  lending  as 
one  of  its  functions.  Established  without  a  capital, 
it  was  understood,  both  by  the  ordinance  which 
created  it  and  by  the,  public,  to  have  actually  in  its 
vaults  the  whole  amount  of  specie  for  which  bank 
money  was  at  any  time  outstanding.  The  original 
scheme  did  not  provide  for  any  further  use  of  its 
credit,  and  the  bank  therefore  failed  to  answer  the 
definition  of  a  bank  in  the  modern  sense.  Having 
no  means  of  holding  securities  as  a  source  of  income, 
and    the   specie    deposited    with    it    being  idle,  the 


THE    BANK   OF   AMSTERDAM.  9I 

establishment  could  meet  its  expenses  only  by  the 
charges  which  it  levied  upon  depositors,  for  the 
opening  and  management  of  their  accounts  and  for 
making  transfers.  The  great  number  of  accounts 
opened,  however,  and  the  extended  use  of  bank 
money  as  a  circulating  medium,  made  the  bank  a 
considerable  source  of  revenue  for  the  city  * ;  and 
this  income  was  naturally  increased  when  the 
original  deposit  business  of  the  bank  was  replaced 
by  a  new  method  of  advancing  upon  coin. 

In  January,  1683,  the  bank  established  a  system 
of  making  advances  upon  deposits  of  coin,  upon  a 
plan  which  had  already  had  a  short  trial  in  ^j^^  ^  ^^^^ 
1656,  and  which  finally  determined  the  of  advances 
character  of  the  institution  for  the  remain-  "^°"  specie, 
der  of  its  existence*  The  advances  were  made  by 
giving  to  any  depositor  of  specie  a  credit  on  the 
books  of  the  bank,  for  an  amount  of  bank  money  not 
far  from  the  actual  value  of  the  specie  reckoned  in 
heavy  coin,  the  depositor  receiving  at  the  same  time 
a  "  recepisse/'  certifying  his  right  to  withdraw  the 
deposit  within  six  months,  upon  returning  the  bank 

*  Adam  Smith  sets  the  number  of  accounts  at  2,000,  but  Mees  pre- 
fers the  estimate  of  5,000  given  by  Oudermeulen,  Bankwezen,  p.  in. 
The  net  return  to  the  city  in  different  years  varied  from  a  profit  of 
266,000  gulden  in  1781,  to  28,000  in  1784,  and  from  1609  to  1796 
averaged  65,500  gulden.     //^^V.,  p.  149. 

^  This  system  of  advances  occupies  an  important  place  in  Adam 
Smith's  account  of  the  bank,  and  Smith  says  that  he  received  *'  the 
most  distinct,  as  well  as  liberal  information"  concerning  the  bank 
from  Mr.  Henry  H#^  #f  Amsterdam,  the  well-known  banker.  See, 
in  the  Wealth  of  Nations,  the  advertisement  to  the  fourth  edition, 
page  Ivii.  of  McCulloch's  edition.  Mees  discusses  the  system  of  ad- 
vances thoroughly,  Bankwezen,  pp.  95,  135. 


92  CHAPTERS   ON   BANKING. 

money  with  which  he  had  been  credited  and  paying 
therefor  one  eighth  of  one  per  cent,  interest.  The 
depositor  also  had  the  privilege  of  renewing  the 
deposit,  upon  the  payment  of  the  specified  interest, 
for  the  further  space  of  six  months,  and  so  on  with- 
out limit  ;  but  if  the  specie  was  not  withdrawn  nor 
the  transaction  renewed  at  the  end  of  any  period  of 
six  months,  the  deposit  became  the  property  of  the 
bank  and  the  recepisse  given  for  it  expired^  The 
advances  upon  this  system  were  at  first  made  on 
a  few  descriptions  of  coin  only ;  but  as  time  went  on 
other  descriptions  of  Dutch  money,  both  gold  and 
silver,  were  received,  the  commonly  current  foreign 
moneys  were  also  accepted,  and  at  times  advances 
were  made  upon  bullion.  In  an  age  when  a  varying 
demand  for  a  particular  coin,  in  such  a  market  as 
Amsterdam,  might  cause  frequent  and  considerable 
fluctuations  in  its  current  value,  this  system  afforded 
the  owner  of  specie  an  attractive  method  of  obtain- 
ing the  present  use  of  his  money  and  also  saving  the 
chances  of  its  rise  in  the  market.  This  class  of 
transactions  therefore  rapidly  increased,  and  although 
a  large  part  of  the  specie  deposited  became  the  prop- 
erty of  the  bank,  by  the  failure  of  the  depositors 
either  to  redeem  it  or  to  renew  their  recepisses,*  the 
business  of  advancing  upon  specie  appears  in  the 
eighteenth  century  to  have  completely  superseded 
the  earlier  practice  of  simple  deposit. 

The  adoption   of   the  system   of   advances   upon 
specie  in  1683,  however,  not  only  changed  the  form 

^  The  nature  and  purpose  of  the  recepisse  have  been  strangely  mis-  • 
conceived  by  McCulloch  and  McLeod.      Quarterly  Journal  of  Eco- 
nomics, October,  1888,  p.  107. 


THE   BANK   OF  AMSTERDAM.  93 

of  the  transaction  by  which  the  bank  money  was 
created,  but  also  had  an  important  effect  upon  the 
convertibility  of  the  bank  money.  There  is  no 
question  that  in  the  earlier  years  of  the  bank  the 
owner  of  bank  money  had  the  right  to  demand  its 
redemption  in  specie,  and  that  its  convertibility  at 
the  will  of  the  holder  was  relied  upon  to  insure  its 
steadiness  of  value.  The  language  of  the  ordinance 
of  1609  shows  this  to  have  been  a  part  of  the  original 
scheme,  and  the  long  succession  of  regulations  made 
necessary  by  the  fluctuating  value  of  coin  in  the  next 
seventy  years  constantly  regulate  the  payments  to 
be  made  by  the  bank  in  redemption.  In  1672,  in 
the  alarm  caused  by  the  advance  of  the  French  to 
Utrecht,  payments  were  made  on  a  great  scale,  in 
the  presence  of  what  appears  to  have  been  a  '*  run  ** 
upon  the  bank.  But  in  the  eighteenth  century  the 
redemption  of  bank  money  upon  demand  had  ceased. 
No  precise  date  can  be  assigned  for  its  discontinu- 
ance ;  no  ordinance  or  other  legal  authority  for  such 
a  vital  change  has  been  cited  ;  but  the  fact  is  estab- 
lished, that  by  the  middle  of  the  eighteenth  ^^^^  money 
century  the  right  of  demanding  payment  becomes  in- 
had  been  obsolete  so  long,  that  more  than  *^°"^^''*^ 
one  writer  of  that  age  doubts  whether  it  ever  had 
existed.  As  a  substitute  for  the  regular  redemption 
of  bank  money  over  the  counter,  the  bank  had 
adopted  the  method  of  selling  through  outside 
agents,  either  bank  money  for  specie  or  specie  for 
bank  money,^   at   fixed   rates    and    usually    in   such 

^  Sir  James  Steuart,  Principles  of  Political  Economy,  ii.,  p.  302. 
Smith,  Wealth  of  Nations  (McCuUoch's  edition),  p.  214.  Savary, 
Lg  Parf ait  N^gociani  {edition  of  1752),  i.,  pp.  483,  484. 


94  CHAPTERS   ON   BANKING. 

amounts  as  the  public  might  require.  Thus,  for 
many  years  the  bank  bought  in  bank  money  when 
the  agio  on  it  fell  to  4^  per  cent,  and  sold  whenever 
the  agio  rose  to  4^  per  cent.,  and  by  this  means 
limited  the  fluctuation  of  bank  money  within  such 
narrow  limits  as  seemed  to  bespeak  remarkable 
fixity  of  value.  But  this  was  after  all  a  substitute 
for  convertibility,  and  not  convertibility  itself. 
Throughout  the  most  flourishing  period  of  the  bank, 
certainly  for  the  last  century  of  its  existence,  the 
currency  supplied  by  the  Bank  of  Amsterdam  was 
an  inconvertible  currency. 

This  inconvertibility  of  the  bank  money  was  a 
natural,  though  perhaps  not  a  necessary,  result  of 
the  introduction  of  the  system  of  advances  upon 
other  money  than  the  strictly  bankable  coin  in 
which  the  bank  had  hitherto  made  its  payments. 
Under  its  earlier  system  the  bank  was  expected  to 
have  in  its  vaults  specie  of  the  same  kind  as  that 
which  it  was  bound  to  pay  and  to  the  full  amount  of 
its  debts.  But  its  advances  upon  other  descriptions 
of  specie  added  to  the  mass  of  bank  money  calling 
for  payment  in  bankable^specie,  without  adding  to 
the  amount  of  such  sp^ie  held  by  it.  It  held  specie 
no  doubt  for  its  bCnk  tnoney,  but  not  exclusively 
specie  that  could  be  used  in  payment, — valuable 
assets,  but  not  necessarily  available  assets.  As  the 
recepisses  expired,  this  unavailable  specie  became 
the  property  of  the  bank,  and  although  at  the 
present  day  the  maintenance  of  regular  payments 
by  means  of  such  a  resource  would  appear  easy, 
even  when  the  amount  of  actually  available  specie  in 


THE   BANK   OF   AMSTERDAM.  95 

hand  might  not  be  large,  it  may  well  have  appeared 
otherwise  to  the  less  experienced  managers  of  two 
centuries  ago.  It  may  easily  have  seemed  to  them 
to  be  safer  and  equally  advantageous  for  the  public 
to  provide  for  taking  any  excess  of  bank  money  out 
of  the  market,  without  continuing  to  give  to  every 
holder  a  right  to  demand  payment  in  certain  limited 
descriptions  of  coin. 

It  has  been  pointed  out  also  that  this  course, 
which  met  the  supposed  needs  of  the  bank,  also 
answered  sufficiently  the  convenience  of  This  change 
merchants.  To  sell  bank  money  at  the  took  place 
current  quotation  for  current  money,  was  *"^®"^^  ^' 
a  simpler  operation  for  the  merchant  who  required 
specie,  than  to  arrange  with  the  bank  officers  for  the 
premium  at  which  a  particular  description  of  coin 
should  be  taken,  or  than  even  the  conversion  of 
bankable  coin  received  from  them  into  ordinary 
current  cash.  It  is  not  unlikely  that  in  practice  the 
purchase  and  sale  of  bank  money  for  cash  had  be- 
come so  well  recognized  as  a  substitute  for  direct 
demands  upon  the  bank,  that  merchants  only  needed 
an  assured  opportunity  for  purchase  or  sale  at  the 
will  of  the  individual,  in  order  to  discontinue  alto- 
gether the  earlier  practice  of  redemption.  This 
opportunity  was  given  by  means  of  outside  agents 
or  cashiers,  as  has  been  stated  above.  A  radical 
change  of  method  was  thus  introduced  by  a  natural 
process,  without  requiring  the  bank  at  any  stage  to 
announce  the  formal  discontinuance  of  regular  re- 
demption, and  the  mercantile  community  of  Amster- 
dam lost  the  tradition  of  the  old  right  of  demand 


96  CHAPTERS   ON   BANKING. 

Upon  the  bank,  with  the  facility  with  which  such 
communities  everywhere  forget  all  that  is  not  matter 
of  actual  record/ 

But  the  change,  although  easily  made,  imported  a 
radical  change  in  the  character  of  the  bank  money 
Bank  money  ^^^  ^^^  grounds  on  which  its  credit  rested, 
then  had  no  If  the  action  of  the  outside  agents  of  the 
bank  had  been  completely  automatic  and 
recognized  as  such,  if  they  had  bought  and  sold  bank 
money  in  answer  to  all  demands  and  to  whatever 
amount,  even  with  such  a  range  of  rates  as  is  stated 
above,  the  distinction  between  such  an  arrangement 
and  ordinary  convertibility  would  have  been  thin. 
But  in  so  far  as  their  action  was  not  automatic,  but 
depended  upon  the  irregular  will  of  the  managers  of 
the  bank,  the  bank  money  was  an  inconvertible  cur- 
rency, with  its  fluctuations  moderated  by  the  inter- 
ference of  the  issuing  body.  The  occasions  were  not 
few  in  the  eighteenth  century  on  which  the  low  agio 

*  The  ordinance  establishing  the  bank  in  1609  provides  that  every 
one  may  bring  to  it  such  moneys  or  bullion  as  he  may  see  fit,  "  and 
the  same  moneys  or  the  worth  of  the  said  bullion  draw  out  again  at 
his  pleasure."  Marperger,  Beschreibung  der  Banken^  p.  120,  appears 
to  recognize  the  necessity  of  payment  in  some  cases,  writing  in 
1716.  But  the  later  commercial  writers,  as  well  as  Smith  and 
Steuart,  treat  payment  on  demand  as  non-existent.  Oudermeulen, 
Rechcrches  sur  le  Comtnerce,  ii.,  part  i.,  p.  58,  states  the  case  thus; 
'*  Si  la  Banque  n'achette  pas  pour  elle  meme  de  I'argent  de  Banque, 
son  depot  ne  peut  pas  diminuer.  Car  qui  pent  obliger  la  Banque  k 
faire  sortir  les  deniers  ou  les  Especes,  si  les  re9us  n'existent  pas  ?  Du 
moins  j'avoue  que  je  n'en  ai  pas  vu  d'exemple  de  mon  tems." 

Bondt,  in  his  Consider atien  over  7  Bankgeld,  argues  that  the  right 
to  demand  the  payment  of  bank  money  was  never  lost  by  non-user. 
Nieuwe  NederlandscJie  yaardocken,  1 791,  p.  296T 


THE   BANK   OF   AMSTERDAM.  9/ 

on  bank  money  showed  the  insufficiency  of  the  pur- 
chases made  for  the  bank,  and  their  failure  to  answer 
the  purpose  of  regular  redemption ;  and  that  the 
public  retained  its  faith  in  the  bank  under  these 
circumstances,  and  notwithstanding  the  profound 
secrecy  which  covered  all  its  transactions,  can  only  be 
ascribed  to  a  blind  belief  in  the  wise  management  of 
the  institution  and  a  widespread  notion  that  the  bank 
money  had  a  fixed  value  of  its  own,  so  that  no 
change  of  agio  could  be  significant  of  any  thing 
amiss  in  the  affairs  of  the  bank. 

How  completely  the  transactions  and  condition  of 
the  bank  were  kept  secret  is  shown  by  the  general 
ignorance  which  prevailed  as  to  the  real  condition  of 
extent  of  its  business.  The  increase  of  the  bank 
bank  money  being  limited  by  its  uses  as  a  ^^  ^^^^^  * 
circulating  medium  and  by  the  more  or  less  steady 
withdrawal  of  any  surplus,  the  actual  amount  of  such 
money  outstanding,  and  of  coin  and  bullion  repre- 
sented by  it,  was  probably  at  no  time  so  great  as  the 
pubhc  supposed.  The  important  position  of  the 
bank  in  Amsterdam,  and  the  place  which  Amsterdam 
held  among  the  markets  of  Europe,  seemed  to  make 
the  bank  a  vast  storehouse,  in  which  the  supplies  of 
the  precious  metals  received  from  all  parts  of  the 
world,  generation  after  generation,  were  buried  in 
a  constantly  accumulating  mass.  Savary  set  the 
amount  of  specie  in  the  vaults  at  300,000,000  gul- 
den ;  Melon  set  it  at  400,000,000,  and  the  Dutch 
editor  of  Melon  oorrected  this  by  the  conjecture  of 
800,000,000  or  900,000,000.  Magens  made  the  more 
sober  estimate  of  60,000,000,  and  finally  Adam  Smith 
7  >• 


98  CHAPTERS   ON   BANKING. 

set  the  amount  for  1775  at  about  33,000,000  gulden.* 
There  is  reason,  independently  of  the  high  authority 
from  which  Smith  received  his  account  of  the  bank, 
to  beHeve  that  this  figure  represented  very  nearly 
the  ordinary  amount  for  which  the  bank  was  in- 
debted during  that  part  of  the  eighteenth  century 
when  its  business  was  most  flourishing.  This  reality, 
however,  fell  far  short  of  the  fabulous  sums  which 
long-established  tradition  represented  as  lying  in  the 
mysterious  vaults  under  the  Stadthaus. 

The  administrative  organization  of  the  bank  was 

well  contrived  for  the  preservation  of  this  secrecy. 

The  city  e^overnment  appointed  a  board 

Itsadminis-  -^     ^  ^  .  . 

tration  or-  of  commissioners,  at  first  three  m  number 
ganizedfor     ^j^^    afterwards    seven    or   eie^ht,  to   take 

secrecy.  ° 

charge  of  the  bank  and  to  make  an  annual 
report  upon  its  affairs.  The  greater  part  of  the  com- 
missioners  were   taken    from    the    city  government 

^  A  variety  of  conjectures  are  collected  by  Mees,  Bankwezen^ 
p.  III.  Sir  William  Temple,  in  his  Observations  upon  the  Nether- 
lands (1673),  speaks  of  the  bank  as  containing  "  the  greatest  treasure, 
real  or  imaginary,  that  is  known  anywhere  in  the  world."  But  he 
seems  to  have  had  a  shade  of  doubt  as  to  its  complete  reality.  For 
Melon's  estimate  see  Essai  sur  le  Commerce  (edition  of  1742),  p.  241. 
Oudermeulen,  ii.,  part  i,  p.  66,  after  saying  that  the  treasure  of  the 
bank  is  large,  adds:  **J'ai  e'te  en  e'tat  d'en  parler  pertinemment  et 
avec  certitude,  par  le  bonheur  que  j'ai  eu  de  rencontrer  quelques 
Bilans  de  notre  Banque,  entr'autres  ceux  des  annees  1727,  1739  & 
1740,  &  encore  un  plus  re'cent.  J'aurois  done  pu  specifier  a  quelle 
somme  se  monte  ordinairement  le  depot ;  mais  la  discretion  ne  me  I'a 
pas  permis.  D'ailleurs  cet  objet  ne  pourroit  tout  au  plus  servir  qu'4 
satisfaire  une  curiosite,  dont  le  public  ne  pourroit  pastirer  lamoindre 
utilite.  Tout  ce  que  je  puis  assurer,  c'est  que  le  depot  est  tres-con- 
siderable."  The  reasons  for  this  discretion,  it  will  be  seen,  became 
manifest  a  few  years  later. 


THE   BANK   OF  AMSTERDAM.  99 

itself,  however,  and  all  were  sworn  to  obey  its 
authority,  so  that  no  independent  judgment  or  in- 
fluence could  be  looked  for  as  a  check  upon  the 
policy  or  determinations  of  the  city  councils  ;  and,  as 
a  further  security  against  any  possible  influence  of 
this  kind,  the  officers  of  the  bank,  who  were  under 
the  orders  of  the  commissioners,  were  also  strictly 
bound  to  obedience  to  the  burgomasters.  The 
bookkeepers  and  clerks,  as  well  as  the  commis- 
sioners, were  sworn  to  strict  secrecy  as  to  every 
thing  which  related  to  the  condition  of  the  bank, 
and  the  obligation  was  not  relaxed  if  the  individual 
ceased  to  be  an  officer.  \  In  this  way  all  real  power 
was  kept  in  the  hands  of  the  city  authorities,  without 
danger  of  opposition  or  even  of  criticism,  and  all 
knowledge  of  the  steps  taken  or  of  the  real  state 
of  affairs  at  any  given  time  was  confined  almost  as 
completely  to  those  who  were  responsible  for  any 
misguidance  or  error. 

In  an  age  when  the  importance  of  publicity  was 
not  yet  understood,  this  jealous  exclusion  of  the 
light  does  not  appear  to  have  injured  the  credit 
of  the  bank.  Secrecy  appears  to  have  been  ac- 
cepted by  all  the  world  as  the  natural  method  of 
managing  important  interests,  and  it  was  enough 
^that  the  city  of  Amsterdam  had  pledged  its  faith 
for  the  safekeeping  and  proper  application  of  the 
treasure  in  its  hands.  At  intervals,  for  the  last 
century  of  the  existence  of  the  bank,  doubts  were 
raised  as  to  the  actual  presence  of  all  the  specie  rep- 
resented by  the  bank  money,  but  these  appear  to 
have   been    easily   satisfied,  or  dismissed  as   unim- 


lOO  CHAPTERS   ON   BANKING. 

portant,  although  it  is  now  certain  that  in  some 
cases  at  least  they  were  well  founded.  In  the 
absence  of  any  published  accounts  it  was  always 
possible  that  the  city  administration,  for  reasons 
of  its  own,  might  make  loans  to  individuals  or 
companies  by  crediting  them  with  bank  money 
without  receiving  any  deposit  of  specie  therefor,  or 
might  by  the  same  process  borrow  from  the  bank 
on  behalf  of  the  city,  and  at  times  the  suspicion 
of  some  such  operation  was  afloat,  strengthened 
occasionally  by  the  failure  of  the  bank  to  sustain 
the  premium  on  bank  money  by  sufficient  purchases, 
and  then  laid  aside  as  the  premium  regained  its  cus- 
tomary level.  On  the  whole,  however,  it  is  clear 
from  the  language  of  the  contemporary  writers  that 
in  the  last  half  of  the  eighteenth  centuiy  the  position 
of  the  bank  had  become  a  matter  of  debate** 

It  does  not  appear,  however,  that  serious  alarm 
was  felt  as  to  the  safety  of  the  bank  until  the 
disclosures  of  1790  and  1791.  The  public  appears 
to  have  been  ready  to  accept  the  explanation  that  a 
low  premium  on  bank  money  was  due  to  scarcity 

^  There  is  a  good  deal  of  evidence  to  be  collected  showing  rather 
more  than  a  passing  doubt  on  this  subject,  but  it  is  enough  to  cite 
the  following:  Steuart,  ii.,  p.  307,  discusses  the  question  whether 
the  treasure  has  been  used  for  public  purposes,  and  concludes  that- 
there  is  coin,  to  the  full  extent  of  the  bank  credits,  actually  in  the 
vaults.  Adam  Smith  (McCuUoch's  edition),  p.  214,  treats  the 
question  as  to  the  actual  presence  of  all  the  coin  called  for  by  the 
bank  money  in  a  somewhat  guarded  way,  as  if  Mr.  Hope,  if  the  lan- 
guage used  is  his,  felt  himself  to  be  on  the  defensive.  Oudermeulen, 
ii.,  part  i.,  p.  69,  noticing  a  remark  in  Pinto's  Traiie  de  la  Circulation 
et  du  Crddii^  that  the  money  in  the  bank  could  be  made  to  circulate 


THE    BANK    OF   AMSTERDAMv  ,    ,  ■-,    . JQI 

and  undue  value  of  silver,  and  that  large  purchases  of 
bank  money  under  such  circumstances  would  be  fol- 
lowed by  a  heavy  export  of  coin  and  bullion,  to  the 
injury  of  commerce.  But  in  the  winter  of  1789  and 
1790  the  premium  fell  below  two  per  The  Bank 
cent.  ;  in  August,  1790,  it  had  disap-  discredited 
peared,   and   in    November   bank   money  1^1790. 

was  at  two  per  cent,  discount ;  and  as  the  bank  still 
did  not  protect  its  credit  by  purchasing  bank  money 
on  any  sufficient  scale,  the  fear  that  for  some  reason 
it  was  unable  to  do  so  began  to  spread.  On  the  12th 
of  November  the  city  administration  issued  a  notice, 
in  which,  after  defending  their  inaction,  on  the  ground 
that  if  they  had  bought  bank  money  as  usual  in  the 
falling  market  the  specie  would  have  been  sent  out 
of  the  country,  they  offered  silver  to  all  holders 
of  bank  money  at  a  rate  which  was  equivalent  to 
a  payment  of  90  per  cent.,  and  proposed  also  to  give 
credit  at  the  same  rate  for  silver  bars  deposited.^ 
The  right  of  fixing  different  terms  after  the  current 
month  was  reserved,  but  as  the  bank  proposed  to  re- 
ceive silver  as  well  as  pay  it  out  at  the  new  rate,  the 

without  injury  to  credit  or  good  faith,  says  that  this  is  practicable 
only  in  two  cases :  first,  if  the  city  or  state  is  in  pressing  need  ; 
second,  if,  e,  g.^  the  East  India  Company  should  need  some  millions, 
which  could  be  credited  to  them  in  bank  money,  and  perhaps  finally 
paid  off  by  them  with  3  per  cent  interest.  Suppose,  he  says,  that  to 
25  millions  existing,  5  millions  of  pu^e  credit  are  thus  added,  as  if  5 
ounces  of  alloy  were  added  to  25  ounces  of  silver  in  the  coin, — this 
would  be  mischievous  and  unjustifiable.  Oudermeulen  published  his 
book  in  1779,  and  this  supposed  case  can  hardly  have  been  a  random 
shot. 

'  The  notice  is  in  Mees,  Bankwezen,  p.  189. 


.  JQ3,  . ;  ,  -  .  • .    . ;  CHAPTERS   ON   BANKING. 

lingering  hope  that  bank  money  could  rise  was  de- 
stroyed, and  the  proposition  was  regarded  as  a  plan 
for  settling  debts  at  a  discount,  by  a  debtor  who 
could  not  pay  in  full.  It  was  insisted,  on  behalf 
of  the  creditors,  that  the  old  right  to  demand  the 
redemption  of  bank  money  had  not  been  lost  by 
disuse  ;  that  the  apprehension  as  to  the  export  of 
specie  was  groundless,  as  the  current  had  begun  to 
flow  towards  Holland  again,  and  that  the  city  ad- 
ministration was  bound  in  duty  to  use  the  treasure 
of  the  bank  for  the  settlement  of  its  debts  and  to 
procure  by  its  own  credit  whatever  might  be  needed 
in  addition.  The  offer  for  settlement  being  gener- 
ally rejected,  the  bank  began  to  issue  specie  to 
its  agents  for  the  purchase  of  bank  money,  but  early 
in  February,  1 79 1,  this  operation  stopped,  and  the 
failure  of  the  bank,  after  a  career  of  one  hundred  and 
/eighty-two  years,  was  thus  acknowledged. 
rrr  The  general  causes  of  this  failure  appear  to  have 
f/f  j>een  understood,  but  few  details  were  made  public 
'until  the  report  made  in  February,  179S,  by  the 
committee  of  investigation,  appointed  by  the  pro- 
vincial government  of  Amsterdam  after  the  revo- 
lution in  Holland.^  From  that  report  it  appeared 
The  causes  of  that  the  city  was  indebted  to  the  bank 
its  failure.  £qj.  nearly  9,250,000  gulden,  and  that 
as  security  for  this  debt  the  bank  held  the  obliga- 
tions of  the  states  of  Holland  and  West  Friesland  for 

'  This  report  is  printed  in  the  Jaarboeken  der  Bataafsche  Republieky 
for  1795,  pp.  157-160.  It  is  noticeable  that  no  statement  is  made  in 
it  as  to  the  amount  of  bank  money  outstanding,  or  the  amount  of  specie 

on  hand. 


THE   BANK   OF   AMSTERDAM.  IO3 

8,850,000  gulden.  This  substitution  of  public  obliga- 
tions for  cash,  it  further  appeared,  was  the  result  of  a 
practice  which  had  existed  for  not  far  from  a  century 
and  a  half.  Even  before  1657  the  administration  of 
the  bank  had  suffered  individuals  at  times  to  transfer 
more  bank  money  than  their  deposits  of  specie  war- 
ranted, which  was  a  close  approach  to  the  method  of 
making  loans  by  giving  permission  to  overdraw.  In 
that  year  loans  to  individuals  appear  to  have  been  dis- 
continued, and  in  their  stead  the  practice  of  lending 
upon  interest  to  the  Dutch  East  India  Company  was 
introduced.  For  many  years  the  sums  thus  lent  were 
small,  but  the  faith .  of  the  bank  was  nevertheless 
broken,  and  the  way  was  opened  for  larger  opera- 
tions. It  appeared  that,  in  1760,  of  30,000,000 
gulden  which  should  have  been  held  by  the  bank 
in  specie,  it  held  barely  10,000,000,  and  the  condi- 
tion of  affairs  probably  continued  to  be  as  bad  as 
this  for  most  of  the  remainder  of  the  bank's  ex- 
istence.* For  generations  the  peculiar  constitution 
of  the  bank  had  enabled  the  administration  to 
keep  this  guilty  secret  and  to  stifle  suspicion.  A 
system  of  banking  of  great  utility,  under  which  with 
a  faithful  management  failure  was  impossible,  thus 
ended  in  discredit  and  ruin,  from  a  lack  of  any 
public  knowledge  of  the  real  condition  of  affairs, 
and  of  any  responsibility  of  the  managers  to  public 
opinion. 

In   1790  the  city  government  had  for  a  moment 
hinted  a  doubt  as  to   its  obligation  to  redeem  the 

^  A  more  particular  account  of  these  transactions,  from  1657  down, 
is  given  by  Mees,  Bankwezen,  pp.  195-T98. 


I04  CHAPTERS    ON    BANKING. 

outstanding  bank  money/  but  this  untenable  ground 
was  quickly  abandoned,  and  in  February,  1791,  a 
loan  of  six  millions  was  authorized,  the  proceeds  to 
be  used  in  redeeming  bank  money.  In  1795  and 
1796,  between  seven  and  eight  millions  w^ere  raised 
Vain  efforts  ^T  ^^^^  ^^  ordcr  to  rcduce  the  debt  of  the 
to  revive  city  to  the  bank,  and  an  effort  was  made 
to  resume  the  old  business,  but  with  little 
success.  In  1802,  under  the  influence  of  the  Bata- 
vian  government,  it  was  announced  that  the  debt  of 
the  city  had  been  discharged  and  that  there  was  no 
bank  money  outstanding  beyond  the  metal  actually 
in  hand,  and  a  decree  was  issued  forbidding  the  com- 
missioners of  the  bank  to  give  any  credit  on  its  books 
except  upon  a  deposit  of  specie,  absolving  them 
from  obedience  to  any  order  inconsistent  with  this, 
and  making  them  personally  responsible  for  any 
breach  of  the  new  regulation.  But  it  was  too  late 
to  revive  the  bank.  The  exchange  business  could 
not  be  recalled,  the  commercial  position  of  the  city 
had  changed,  and  the  war  for  many  years  prevented 
commerce  from  seeking  again  its  old  channels.  But 
more  than  all,  the  time  for  deposit  banks  of  the  old 
type  had  nearly  passed  and  the  need  of  the  community 
was  for  banking  on  the  modern  system,  of  which  the 
Bank  of  England  had  become  the  leading  example. 
The  present  Bank  of  the  Netherlands  was  therefore 
established  in  18 14,  with  authority  to  make  loans  by 
means  of  its  credit  upon  commercial  paper  and  pub- 

^  This  question  is  argued  at  length  on  behalf  of  the  creditors  by  N. 
Bondt,  Consider atien  over  U.Bankgeld^  printed  in  the  Nieuwe  Neder^ 
landsche  yaarboeken^  1791,  pp-  285-319. 


THE   BANK   OF   AMSTERDAM.  I05 

He  securities.  The  Bank  of  Amsterdam  still  retained 
its  nominal  existence  with  the  aid  of  some  merchants 
who  continued  to  hope  for  its  revival,  but  was  finally 
closed  under  a  royal  decree  of  December  19,  18 19. 
The  small  amount  of  bank  money  still  in  existence 
was  paid  off,  and  in  1820  the  establishment  which  for 
generations  had  held  the  leading  place  in  European 
commerce  ceased  to  exist. 


1/ 


CHAPTER  VIII. 

THE   BANK   OF   FRANCE. 

In  describing  the  leading  modern  systems  of 
banking,  it  will  be  convenient  to  take  the  simplest 
case  first.  This  is  the  case  of  a  bank  au- 
Prance^a  ^  thoHzed  to  practise  discount,  deposit,  and 
bank  of  the  the  issue  of  notes,  but  without  any  special 
simp  es    ype.  pj-^^jg^Qj^    £qj.  ^j^^  safety  of  onc    class   of 

liabilities  rather  than  another.  This  primitive  sys- 
tem was  iadopted  for  the  first  Bank  of  the  United 

(I  States,  founded  by  Hamilton  in  1791  ;  and  the  same 
model  was  followed  in  establishing  the  second  Bank 
of  the  United  States  in  18 17,  and  in  the  earlier  State 
banks.     The  Bank  of  England  also  was  organized  on 

f  the  same  plan  until  1844.  In  all  these  cases  the  law 
provided  so  far  as  it  might  for  faithful  and  honest 
administration,  but  left  all  the  Habilities  of  the  bank 
{^  upon  the  same  footing  and  equally  a  charge  upon  its 
general  assets.  Among  existing  banks,  the  Bank  of 
France  is  a  remarkable  instance  of  this  free  organiza- 
tion, surviving,  prospering,  and  enjoying  the  merited 
confidence  of  the  French  people,  long  after  the  pub- 
lic opinion  of  other  leading  countries  has  required 
special  and  elaborate  provision  for  the  safety  of  all 
bank  credits  taking  the  form  of  notes. 

ic6 


THE   BANK   OF   FRANCE.  lO/ 

From  1793  to  the  latter  part  of  1796,  banking  can 
hardly  be  said  to  have  existed  in  France.  The 
government  tolerated  no  issue  of  paper  except  its 
own;  the  Caisse  d'Escompte,  which  for  many  years 
before  had  been  the  only  public  bank,  had  been  sup- 
pressed, and  the  times  were  too  disturbed  for  private 
banking  to  flourish.  With  the  disappearance  from 
circulation  of  the  assignats^  and  of  their  successors, 
the  inandats  territoriaux,  the  issue  of  notes  appears 
to  have  become  a  matter  of  common  right,  to  be 
undertaken  by  anybody  who  could  gain  the  confi- 
dence of  the  public  ;  and  accordingly  a  bank  of  issue 
called  the  Caisse  des  Comptes  Courants,  was  organ- 
ized in  Paris  in  the  last  half  of  1796,  and  began  its 
operations  with  fair  success.  Two  others  of  some 
importance  were  established  by  the  year  1800,  be- 
sides some  smaller  ones  of  which  little  is  now  known  ; 
and  in  Rouen  a  bank  of  discount  and  issue  was  in 
active  business  as  early  as  1798.  It  is  clear  that, 
with  the  return  of  orderly  government  and  the  re- 
vival of  credit,  the  need  of  banks  began  to  press. 

Under  these  circumstances  the  Bank  of  France 
was  also  established  in  Paris  in  1800,  with  the 
encourae^ement    of    the   eov^ernment    and 

•   1        1         X--  ^       «^-  ^  Established 

even  with  the  rirst  Consul  as  one  of  its  in  1800, 

stockholders,  but  still  upon  a  footing  not'  but  with  no 

•    ti         1-rr  c  ^  /•  •  •    i  monopoly. 

essentially  different  from  that  of  its  neigh- 
bors.    Its  capital  of  30,000,000  francs  was  the  largest " 
yet  proposed,  and  the  difficulty  of  raising  it  led  to  a 
fusion  with  the  Caisse  des  Comptes  Courants,  but  no 
monopoly  was  created.     One  public  bureau,  holding* 
a  large  amount  of  funds,  was  required  to  invest  them 


I08  CHAPTERS   ON   BANKING. 

in  shares  of  the  new  bank,  and  large  deposits  were 
made  in  it  by  the  government  ;  still,  although 
favored,  the  Bank  of  France  stood  legally  upon  an 
equality  with  the  rest  and  nothing  more.^  So  far  it 
might  be  said  that  the  field  was  open  in  France  for 
a  wide  and  free  diffusion  of  banking  facilities,  and 
that  by  the  new  establishment  the"  government 
pointed  out  the  way  for  its  citizens. 

In  1803,  however.  Napoleon  announced  a  com- 
plete change  of  policy,  and  the  Bank  of  France  was 
Made  the  thereupon  made  the  sole  bank  of  issue,  its 
sole  bank  of  Capital  was  raiscd  to  45,000,000  francs,  and 
issue,  1803.  .^g  charter  extended  to  1818.^  All  other 
issues-of  notes  were  at  once  withdrawn,  one  of  the 
rival  banks  in  Paris  was  absorbed  by  the  rising 
monopoly,  and  another  assumed  for  a  time  the 
^humble  place  of  intermediary  between  the  great 
bank  and  its  less  important  customers.  /No  provin- 
cial bank  could  thereafter  be  established  without  the 
authority  of  the  government.  Under  this  arrange- 
ment, and  notwithstanding  the  provision  that  no 
notes  should  be  issued  in  Paris  for  less  than  500- 
francs,  the  circulation  of  the  Bank  rapidly  increased 
with  its  expanding  discounts.      It   is  plain   in   fact 

*  Courtois,  Hisioire  des  Banques  en  France^  pp.  108-112.  The 
articles  of  association,  containing  the  statutes  of  the  Bank,  adopted 
by  the  shareholders  at  the  start,  are  in  the  Moniteur,  5  Pluv.  VITI. 
(25  January,  1800). 

'  The  law  of  24  Germinal  XI.  (14  April,  1803),  is  in  the  Bulletin 
des' Lois ^  and,  with  most  of  the  subsequent  legislation  concerning  the 
Bank  down  to  1857,  is  also  given  in  Wolowski,  La  Question  des 
Banques,  p.  425.  The  statutes  of  the  Bank  of  1803  are  in  the  Moni- 
teur,  15  Brumaire,  XII.  (7  November,  1803). 


THE    BANK   OF   FRANCE.  IO9 

that  the  strong  preference  of  the  pubHc  for  bank 
credit  in  the  form  of  notes  left  but  a  narrow  field  for 
those  banks  which  could  only  open  deposit  accounts, 
and  justified  the  government  in  its  opinion  of  the 
importance  then  to  be  attached  to  the  right  of 
emission.  And  the  fact  that  in  the  existing  state 
of  things,  with  the  existing  habits  of  business,  the 
credit  in  the  form  of  notes  was  so  strongly  preferred, 
gave  to  the  monopoly  of  the  Bank  an  influence  on 
the  future  history  of  banking  in  France  far  beyond 
that  which  a  similar  monopoly  could  have  exercised 
in  the  same  years  in  England.^ 

Although  the  Bank  of  France  still  chose  its  own 
officers  and  enjoyed  a  nominal  independence,  it  was 
now  becoming  involved  in  the  bold  operations  of  the 
French  Treasury.  Complications  thus  arising  re- 
duced the  cash  in  the  Bank,  in  the  latter  part  of 
1805,  so  far  that  it  was  found  necessary  to  limit  the 
redemption  of  notes  to  600,000  francs  daily,-  until 
such  time  as  specie  could  be  collected  in  sufficient 
quantity  for  complete  resumption.  The  result  of 
this  crisis,  however,  was  not  to  separate  the  Bank 
from  the  government,  but  to  connect  them  still  more 
closely;  and  in  the  spring  of  1806  a  measure  was 
therefore  adopted  which  definitely  settled  „,     ^     ^ 

^  -^  Placed  under 

the  character  of  the  Bank  as  a  public  in-  state  control 
stitution,  but  without  any  alteration  in  the  ^"  ^     ' 

essential  principles  of  its  organization  as  a  bank.'*    By 

^  That  the  government  was  actively  hostile  to  the  other  banks  of 
circulation,  see  Courcelle-Seneuil,  TraiU  des  Op&ations  de  Banque^ 
p.  217. 

*  Bulletin  des  Lois, 

IS 


no  CHAPTERS   ON   BANKING. 

the  doubling  of  its  capital  and  the  extension  of  its 
privileges  to  1843/  ^^^  only  its  pre-eminence  in  the 
financial  affairs  of  France,  but  its  absolute  importance 
in  the  European  world,  was  assured,  so  far  as  de- 
pended on  legislation.  At  the- same  time  the  direc- 
tion of  the  Bank,  hitherto  confined  to  a  board  of 
regents  chosen  by  the  stockholders,  was  transferred 
to  a  governor  and  two  sub-governors,  to  be  nomi- 
nated by  the  chief  of  the  state.  Under  a  govern- 
/  ment  not  inclined  to  use  power  for  its  own  ends, 
fthis  species  of  control  might  easily  have  become 
a  mere  trusteeship  on  the  part  of  the  state  ;  under 
an  emperor  like  Napoleon  it  made  the  bank  an 
engine  of  the  state, — a  private  corporation,  indeed, 
as  regards  the  legal  ownership  of  its  property,  but 
public  ofifice  as  regards  the  actual  employment  o 
the  property.  Successive  governments  in  Franc 
have  used  this  opportunity  in  difTerent  ways  as  the 
case  has  seemed  to  require  ;  but  such  as  Napoleoa 
made  the  Bank,  in  pursuance  of  the  law  of  1806,  it 

Lhas  remained  ever  since,— ^  institution  subject  to 
the  control,  and  made  subservient  to  the  needs  of 
the  government  of  the  day.* 

In  the  closing  years  of  the  Empire,  this  subjection 
of  the  Bank  to  the  government  caused  a  great  in- 
crease   of    transactions   with    the    Treasury,    which 

^  In  1840  the  privilege  was  extended  to  1867,  and  in  1857  was 
further  extended  to  1897. 

^  The  statutes  of  the  Bank,  under  the  law  of  April  22,  1806,  were 
established  by  the  Emperor,  January  16,  1808.  See  Wolowski  as 
above,  Bulletin  des  Lois,  and  Moniieur^  January  18,  1808.  In 
Block's  Dictionnaire  de  V  Adminisiraiion^  is  a  detailed  account  of  the 
organization  of  the  Bank.     See  aho  Say,  Didionniare  des  FifiaTzcis* 


THE   BANK   OF   FRANCE.  Ill 

became  more  and  more  compromising  and  finally 
far  exceeded  in  amount  the  advances  made  to  the 
commercial  public.  When,  therefore,  France  was 
invaded  by  the  allies  in  the  winter  of  Brought  to 
1813-14,  a  run  by  the  noteholders  began,  a  low  ebb 
caused,  it  is  probable,  chiefly  by  the  fact  ^"  ^  ^^' 

that  the  Bank  appeared  to  have  no  independent  ex- 
istence of  its  own,  and  it  again  became  necessary  for 
three  montiis  to  limit  the  amount  of  the  daily  re- 
demption of  notes  to  500,000  francs.  Full  payment 
was  resumed  in  April,  18 14,  but  the  settlement  of 
the  affairs  of  the  Bank  was  pushed  on  both  sides, 
until  its  loans  were  reduced  to  less  than  3,000,000 
francs,  and  its  circulation  had  fallen  from  95,000,000 
francs  to  15,700,000.*  The  enlarged  capital  of  the 
Bank  had  been  found,  .even  in  the  latter  years  of 
Napoleon^s  reign,  to  be  larger  than  could  be  used 
with  profit,  and  the  Bank  had  therefore,  as  early  as 
18 1 2,  made  large  purchases  of  its  own  stock.  These 
were  continued  in  18 16,  until  the  capital  was  reduced 
to  67,900,000  francs,  at  which  point  it  remained  until 
1848.  Lafitte,  who  became  governor  of  the  Bank 
under  the  Restoration,  desired  to  improve  the  oppor- 
tunity for  general  change,  by  freeing  the  institution 
from  the  interference  of  the  government,  and  bring- 
ing it  back  to  the  safe  position  of  an  independent 
bank  of  discount ;  but,  although  his  views  appear  to 
have  been  supported  by  the  ministry,  no  measure 

^  The  Moniteur  for  January  31,  18 15,  contains  a  report  by  Lafitte, 
than  provisional  governor  of  the  Bank,  giving  in  some  detail  the 
operations  for  the  year  18 14.  For  tables  giving  the  leading  figures 
of  the  accounts  of  the  Bank  from  1800  to  1879,  see  Courtois,  Histoire^ 
pp.  344,  360. 


112  CHAPTERS    ON    I3ANKING. 

for  carrying  them  out  could  be  passed,  and  the  im- 
perial decree  of  1808,  strengthened 'as  we  shall  see 
by  the  action  of  the  Republic  in  1848,  has  continued 
to  be  the  working  constitution  of  the  Bank. 

The  government  of  the  Restoration  appears,  how- 
ever, to  have  adopted  the  policy  of  re- 
Bourbons  and         .     .  -  1         r 
Louis  Phi-       stricting  the  monopoly  of  the  Bank  to  the 
lippe  establish  capital.     By  the  decree  of  1808  the  Bank 

other  banks.  ^  -' 

had  been  authorized  to  establish  branches 
(comptoirs  d'escoinpte)^  subject  to  approval  by  the 
government,  plainly  with  the  design  of  centralizing 
the  banking  interests  of  the  Empire  under  the  lead 
of  the  great  Bank  in  Paris/  Under  this  decree  the 
establishment  of  branches  in  Lyons  and  Lille  was 
undertaken,  although  with  little  success,  and  one  was 
set  in  operation  at  Rouen.  The  Bourbon  govern- 
ment in  1 8 17  and  18 18  closed  these  branches  and 
established  independent  banks  at  Rouen,  Nantes, 
and  Bordeaux,  giving  to  them  the  right  of  emission, 
and  thus  reversing  the  policy  of  Napoleon.  The 
government  of  July,  following  a  similar  course  for  a 
time,  established  independent  banks  at  Lyons,  Mar- 
seilles, Lille,  Havre,  Toulouse,  and  Orleans,  and  also 
authorized  the  Bank  of  France  to  open  branches  in 
fifteen  other  provincial  towns  and  cities,  with  the 
monopoly  of  issue  for  every  place  in  which  a  branch 
was  established.  Vigorously  pursued,  this  mixed 
system  of  branches  and  of  independent  banks  might 
easily  have  been  made  the  means  of  introducing 
banking  facilities  throughout  the  kingdom,  to  the 
great  advantage    of   the   country,  which  has  never 

^  Moniteur,  28  May,  1808,  and  Btdleiin  dcs  Lois. 


THE    BANK    OF   FRANCE.  II3 

ceased  to  suffer  from  the  backwardness  of  its  de- 
velopment in  this  respect.  But  no  strong  policy  was 
adopted  ;  the  government  established  new  banks  for 
a  time  with  reluctance  and  under  hard  conditions, 
and  after  1838  withheld  its  encouragement  altogether ; 
and  the  Bank  of  France,  opening  its  branches  fit- 
fully and  with  little  regard  for  public  needs,  seemed 
to  prefer  that  affairs  should  drift. 

The  revolution  of  1848  found  in  existence,  then, 
the  Bank  of  France,  with  its  fifteen  branches,  and 
also  nine  independent  banks  of  issue.  No  system  of 
exchanges  or  of  redemption  at  a  common  centre  had 
been  adopted  by  the  latter;  even  the  branches  of 
the  great  Bank  redeemed  each  other's  notes  only  at 
pleasure  ;  so  that  France  felt  all  the  inconveniences 
of  having  many  issues  of  notes  with  but  local  credit. 
The  suspension  of  specie  payment  and  the 

,  ,  ,  .  ,  -  The  Republic 

legal-tender  power  given  to  the  notes  of  re-estabiishes 
the  Bank  of  France,  and  to  those  of  the*^^  "^^.^^p^^^ 

in  1S48. 

independent  banks  alike,*  added  to  the 
confusion,  and  in  the  spring  of  1848  the  provisional 
government  finally  cut  the  knot,  by  making  all  the 
independent  banks  branches  of  the  Bank  of  France. 
Their  shareholders,  in  exchange  for  their  old  stock, 
received  shares  in  the  Bank,  and  the  capital  of  the 
latter  was  thus  raised  to  91,250,000  francs.^  This 
practically  re-established  the  monopoly  in  the  form 
in  which  it  had  been  projected  by  Napoleon,  and 
although  a  vigorous  discussion  of  the  advantages  of 
freedom  in  banking  has  been  carried  on  in  France, 

^  Moniteur^  March  16  and  26,  1848,  or  Bulletin  desLois, 
^  Moniteur^  April  29,  1848,  or  Bulletin  des  Lois. 


114  CHAPTERS   ON   BANKING. 

all  subsequent  legislation  has  tended  to  strengthen 
the  existing  system.  The  government  of  Napoleon 
III.  urged  the  extension  of  its  branches  by  the 
Bank,  and  in  1857  even  called  for  the  establishment 
of  one  in  every  department  within  ten  years.  The 
Bank  was  reluctant,  but  before  1869  sixty-five 
branches  had  been  authorized.  The  republican  gov- 
ernment in  1873  again  applied  the  spur,  and  in  1880 
all  the  required  branches  had  been  authorized, 
although  a  few  were  not  brought  into  operation 
until  as  late  as  1882.' 

After  all,  however,  it  would  seem  that  the  branches 
thus  established  can  fill  but  imperfectly  the  place  of 
local  banks.  A  branch  of  the  Bank  of  France  has  a 
„       ^      ^    capital  allotted  to  it  by  the  Bank,  and  is 

Branches  of  ^  ^  -^  ^  '       ^ 

the  Bank  ill  then  required  to  carry  on  its  business 
ToS  wants  strictly  under  the  supervision  of  the  latter, 
and  without  engaging  in  any  operation 
with  other  branches,  except  by  special  leave,  so  that 
its  business,  even  to  the  rate  of  discount,  is  directed 
by  a  policy  settled  at  Paris  and  not  with  reference  to 
local  wants.  It  has  a  board  of  directors  selected  by 
the  governor  of  the  Bank,  from  a  list  of  candidates  in 
some  cases  made  up  at  Paris  and  in  some  by  local 
stockholders,  where  the  latter  represent  half  of  the 
capital  allotted  to  the  new  branch.  The  real  author- 
ity, however,  is  exercised  by  a  manager  appointed  by 
the  government,  frequently  a  stranger,  and  assisted 
by  subordinates  sent  from  the  capital.  That  under 
such  circumstances  more  than  one  half  of  the  dis- 

*  The  Bank  in  1890  had  94  branches  and  a  great  number  of  auxiliary 
offices,  so  that  in  all  258  "places  bancables"  are  now  reported. 


THE    BANK    OF   FRANCE.  II5 

counts  of  commercial  paper  made  by  the  Bank  should 
be  made  at  its  branches,  as  has  been  the  case  ever 
since  1848,  is  better  evidence  of  the  great  demand 
for  banking  facilities  in  the  provincial  towns,  than  of 
the  success  of  the  present  organization  in  answering 
this  demand. 

That  the  want  of  such  aid  from  independent  banks 
as  a  freer  system  would  have  given  has  been  seri- 
ously felt  by  the  country,  appears  clear  from  the 
measures  to  which  the  French  government  has  found 
itself  driven  in  two  periods  of  political  revolution. 
It  has  been  remarked  that  from  1 8 14  for  many  years 
the  Bank  of  France  was  the  bank  of  the  bankers 
rather  than  of  the  merchants.^  The  position  of  inter- 
mediary between  the  Bank  and  the  great  class  of 
borrowers  on  a  small  scale,  should  have  been  held  by 
a  class  of  independent  banks ;  it  appears,  in  fact,  to 
have  been  held  by  private  bankers,  and 
during  the  revulsion  which  accompanied  ^"dis^count 
the  revolution  of  July,  1830,  this  class  of  °*^"s  "^^^s- 
establishments  either  disappeared  or  be- 
came inactive,  so  that  a  part  of  the  usual  machinery 
of  commerce,  never  adequate,  was  for  a  time  abso- 
lutely wanting,  and  it  seemed  impossible  for  the 
normal  movement  to  begin  again.  The  Chambers 
therefore  voted  that  loans  should  be  granted  by  the 
government  for  the  relief  of  commerce  to  the  extent 
of  sixty  millions,  one  half  to  be  lent  directly  by  a 
public  commission,  and  the  other  to  be  used  in  es- 
tablishing public  discount  offices  in  Paris,  and  in  the 
departments.    The  loans  were  made  at  four  per  cent. 

^  Courtois,  Histoire^  p.  156. 


CHAPTERS   ON   BANKING. 

and  upon  security,  and  the  business  would  seem  to 
have  been  managed  with  better  success  than  could 
have  been  expected ;  for  of  the  thirty  milHons  of 
direct  loans,  made  to  industrial  establishments  and 
divided  between  Paris  and  the  departments  with  tol- 
erable equality,  the  amount  still  unpaid  in  1870,  and 
then  set  down  as  either  bad  or  doubtful,  was  only 
about  900,000  francs.  The  discount  office  in  Paris 
discounted  paper  to  the  amount  of  20,629,000  francs, 
the  securities  averaging  a  little  less  than  560  francs 
each,  and  of  this  not  quite  two  per  cent,  was  still 
unpaid  in  1841.  The  operations  of  the  ten  or  more 
discount  offices  opened  in  the  departments  are  not 
carefully  reported/ 

After  the  revolution  of  1848,  which  carried  down 
and  from  the  greater  part  of  the  discount  houses  in 
1848  to  1850.  Paris,  France  was  again  found  to  be  prac- 
tically destitute  of  any  banking  system  which  could 
reach  the  smaller  commercial  interests,  and  the  gov- 
ernment again  found  itself  compelled  to  establish  in 
haste  the  machinery  needed  for  such  a  crisis.'*  By  a 
combination  of  private  capital  with  public,  discount 
offices  were  established,  in  Paris  and  in  the  depart- 
ments, with  an  organization  and  powers  which  made 
them  strongly  resemble  independent  banks,  having 
the  state  as  a  shareholder.  In  sixty-seven  cities 
of  France,  including  Paris,  the  operations  of  these 
discount  offices  in  1848,  1849,  ^^^  1850  were  greater 

^  See  Courtois,  Hisioire^  p.  138,  for  a  valuable  notice  of  these  opera- 
tions. 

^  Moniteur,  March  8,  1848,  or  Bulletin  des  Lois.  Courtois,  Nisioire^ 
p.  178;  Dictionnaire  de  V Economie  Politique^  article,  **  Comptoirs 
d'Escompte." 


THE   BANK   OF   FRANCE.  11/ 

in  amount  than  those  of  the  Bank  of  France  for  the 
same  years.  A  considerable  number  of  these  offices 
were  allowed  to  continue  their  business  for  several 
years  after  the  revival  of  affairs  under  the  Second 
Empire,  and  some  of  them  were  finally  reorganized 
as  banks  of  discount,  repaying  to  the  state  its  share 
of  the  original  capital.* 

At  the  present  day  the  state  of  things  is  so  much 
changed  that  it  is  hardly  probable  that  any  crisis  of 
affairs  would  find  such  a  hiatus  in  the  banking  or- 
ganization as  existed  in  1830  and  1848.  Thisnecessi- 
The  number  of  independent  banks  of  dis-  tynotiikeiy 
count  has  finally  been  greatly  increased,  .0  recur, 
and  this  not  merely  in  the  great  cities,  and  the  Bank 
of  France,  as  we  have  seen,  now  has  a  branch  in 
every  department.  Embarrassment  might  still  be 
caused  in  some  cases  by  the  provision  in  the  statutes 
of  the  Bank  which  requires  three  signatures  upon  all 
paper  discounted  by  it,  unless  accompanied  by  certain 
specified  collaterals,  this  provision  tending  to  bring  in 
some  third  party  between  the  actual  borrower  and  the 
Bank ;  but  the  agencies  for  banking  now  exist 
throughout  the  country,  and  it  would  only  remain  to 
provide  for  the  details  of  access  to  them.  But  for 
the  monopoly  of  issue  given  to  the  Bank,  these 
agencies  would  probably  have  existed  long  ago  and 
would  have  reached  a  much  higher  development  than 

^  One  of  these  became  the  Comptoir  d'Escompte  of  Paris,  which, 
with  a  capital  of  80,000,000  francs,  carried  on  a  successful  business 
for  many  years,  but  failed  disastrously  in  1889,  upon  the  collapse  of 
the  great  copper  syndicate,  with  which  it  had  become  involved.  Cour- 
celle-Seneuil,  TVazV,  p.  187  ;  Quarterly  Journal  of  Economics ^'^xiX^i 
1889.  p.  506. 


Il8  CHAPTERS   ON  BANKING. 

they  have  as  yet.  Deprived  of  the  use  of  that  form 
of  credit  which  is  chiefly  in  demand  in  the  more  re- 
mote districts,  banking  capital  has  spread  itself  but 
slowly,  and  the  privileged  institution  has  found  little 
occasion  to  exert  itself  to  supply  the  want,  until 
stimulated  by  peremptory  legislation. 

That  the  Bank  of  France  itself  now  meets  the  pub- 
lic wants  much  more  freely  than  formerly,  is  clear 
from  the  great  diminution  in  the  average  importance 
of  the  securities  discounted  by  it.  Before  1830  these 
securities  were  on  the  average  not  far  from  2,500 
francs  each  in  amount ;  from  that  point  they  have 
fallen  irregularly,  but  still  with  a  marked  general  ten- 
dency, until  the  average  now  appears  to  have  settled 
permanently  at  less  than  900  francs.*  As  this  change 
has  taken  place,  notwithstanding  an  immense  in- 
crease in  the  aggregate  loans  of  the  Bank  and  a  great 
rise  in  the  scale  of  financial  operations  at  Paris  as 
well  as  at  other  centres  of  business,  we  can  only  con- 
clude that  the  Bank  now  systematically  admits  to  its 
portfolio,  in  larger  proportion  than  formerly,  the 
paper  coming  to  it  indirectly  from  traders  of  the 
smaller  class. 


r 


^  The  policy  of  favori/g^tlie^SinalLUade-of-Paris  was  established  by 
Napoleon  in  the  statutes  of  the  Bank  in  1808,  where  it  is  provided  that 
**  il  sera  pris  des  mesures  pour  que  les  avantages  resultant  de  I'etab- 
lissement  de  la  ban  que  se  f  assent  sentir  au  petit  commerce  de 
Paris.  ..."  Some  of  the  paper  discounted  by  the  Bank  in 
masses  for  bankers  and  others  is  extraordinarily  minute.  In  i88g, 
out  of  5,667,119  pieces  discounted  in  Paris,  19,100  were  for  10  francs 
or  less,  836,417  for  from  11  to  50  francs,  and  1,076,072  from  51  to 
100  francs.  The  proportion  of  small  paper  discounted  has  risen 
steadily  for  several  years.  See,  for  comparison,  a  statement  as  to  the 
size  of  loans  in  several  parts  of  the  United  States,  by  the  Comptroller 
of  the  Currency,  Report  for  i83o,  p.  16. 


THE    BANK    OF   FRANCE.  I  I9 

We  have  already  referred  to  the  suspension  of 
specie  payment  by  the  Bank  of  France  in  March, 
1848.  The  suspension  was  authorized,  the  The  Bank 
notes  made  a  legal  tender,  and  the  issue  MaTch'Tsls' 
of  notes  as  low  as  100  francs  permitted,  to  June,  1850. 
on  condition  that  the  issues  of  the  Bank,  and  of  all 
the  independent  banks  soon  after  consolidated  with 
it,  should  not  exceed  452,000,000  francs.  Political 
and  socialist  agitation  destroyed  all  commercial  con- 
fidence and  a  rapid  liquidation  went  on ;  the  dis- 
counts of  the  Bank  fell  off,  specie  flowed  in,  and 
in  June  specie  payment  was  practically  resumed,  and 
the  legal-tender  provision  might  perhaps  have  been 
abrogated  with  safety,  had  the  Bank  been  left  to 
itself.  The  Treasury,  however,  was  embarrassed,  the 
Bank  saw  iew  opportunities  of  using  its  resources 
profitably,  and  advances  to  a  considerable  amount 
were  therefore  made  by  it  to  the  government.  Partly 
as  a  consequence  of  these  advances  the  limit  of  the 
note  circulation  was  raised  in  December,  1849,  ^^ 
525,000,000  francs  ^ ;  and  the  suspension  of  specie 
payment  was  not  ended  and  the  legal-tender  power 
of  the  notes  destroyed,  until  August  6,  1850.'  By 
these  means,  aided  by  its  own  great  prudence,  the 
Bank  not  only  passed  through  the  gloomy  years  from 
1848  to  1852  without  serious  loss,  but  continued  when 
affairs  were  at  their  worst  to  earn  a  modest  profit  for 
its  stockholders.' 

*  Moniieur,  December  23,  1849,  or  Bulletin  des  Lois. 

^  Moniteur,  August  13,  1850  ;  Bulletin  des  Lois^  T.  166,  p.  265. 

*  At  the  end  cf  1848  the  Bank  of  France  held  overdue  paper 
amounting  to  85,000,000  francs.  Of  this  76,000,000  francs  were  paid 
in  1849,  and  subsequent  payments  soon  reduced  the  balance  so  that, 
it  is  conjectured,  the  real  loss  of  the  Bank  from  bad  debts  during  the 


I20  CHAPTERS    ON   BANKING. 

A  great  expansion  of  the  business   of  the  Bank 
began  in  1852.     The  coup  d'etat^  which  opened  the 
way  for  a  restoration  of  imperial  govern- 
pa^nSo^n  from  nient,  at  all  events  removed  political  un- 
1852,  certainty.     Commercial  confidence  there- 

upon revived,  and  the  discounts  and  advances  made 
by  the  Bank  to  individuals  rapidly  increased,  and  in 
1853  touched  a  higher  point  than  was  ever  before 
known.  The  Crimean  war  brought  no  interruption 
of  this  quick  growth.  The  Bank  felt  its  share  of  the 
burdens  of  that  period,  in  the  difficulties  caused  by 
general  financial  embarrassments,  which  forced  it  to 
import  for  its  own  safety  specie  to  the  amount  of 
800,000,000  francs,  at  a  cost  varying  from  i-^  to 
\\  per  cent.^ ;  but  it  found  its  compensation  in 
dividends  rising  in  1856  to  27  per  cent.  In  view 
and  increase  ^^  ^^^  general  cxpansion  it  is  not  surpris- 
of  capital  in  ing  that  in  1857  the  government  deter- 
^  ^^'  mined  to  double  the  capital  of  the  Bank, 

raising  it  to  182,500,000  francs  at  which  it  now 
stands.  It  is  characteristic,  however,  of  the  shifty 
financial  policy  of  that  period,  that  this  increase  of 
capital  was  used  as  an  opportunity  for  placing  a 
government  loan  to  which  the  market  happened 
to  be  unfavorable.  The  Bank  upon  raising  its  91,- 
250,000  francs  of  fresh  capital  was  required  to  invest 
100,000,000  francs  in  new  three  per  cents.,  issued  for 
the  reduction  of  the  floating  debt,  which  had  risen  to 

revolution  was  not  over  500,000  francs,  although  it  charged  at  the 
time  4, 500,000  francs  to  profit  and  loss.  Its  dividends  during  1848,  the 
worst  year,  were  75  francs  on  the  share  of  1000.  Courtois,  Hisioire^ 
p.  186,  note,  * 

^  Courtois,  IHsioire^  p.  222  ;  Tooke,  History  of  Pricts,  vi.^  p.  85. 


THE   BANK   OF   FRANCE.  121 

an  awkward  amount.*  The  charter  was  at  the  same 
time  extended  to  1897,  authority  was  given  to  issue 
notes  as  small  as  50  francs,  and  the  government  was 
empowered  after  1867  to  require  the  opening  of  a 
branch  of  the  Bank  in  every  department.  But  per- 
haps the  most  important  of  the  new  features  of  the 
charter  was  the  provision  made  as  to  the  rate  of  dis- 
count. For  the  greater  part  of  its  existence  the 
Bank  had  striven  to  maintain  the  uniform  rate  of 
four  per  cent.  The  statutes  of  1808  had  fixed  at 
three  months  the  maximum  length  of  the  paper  to 
be  admitted  to  discount,  but  in  periods  of  difficulty 
the  Bank  had  sometimes  lowered  this  limit  to  sev- 
enty-five, sixty,  and  even  forty-five  days.  In  1854, 
however,  it  definitely  adopted  the  policy  of  a  varia- 
ble rate  of  discount,  but  then  found  it-  Adoption  of 
self  hampered  by  a  law  passed  in  \^6j,  ^'^^  ^f^^^^ 
which  made  six  per  cent,  the  Xvsxixt^^:  discount, 
legally  chargeable  interest.  The  ch^ter  of  1857 
freed  the  Bank  by  special  exemptiojn  from  this  restric- 
tion, allowing  it  to  charge  whatever  rate  it  may  find 
advisable,  with  the  provision,  however,  that  the  profits 
earned  by  charging  a  rate  above  six  per  cent,  shall 
not  be  divided  but  carried  to  a  permanent  surplus.^ 

^  Moniieur^  June  11,  1857,  or  Bulletin  des  Lois,  Under  this  law  a 
share  of  new  stock  was  given  to  the  holder  of  a  share  of  old,  upon 
payment  of  iioo  francs,  the  par  being  1000,  and  this  payment,  col- 
lected upon  91,250  shares,  supplied  the  100,000,000  francs  required 
by  the  government.  The  stockholders,  whose  shares  were  worth 
4500  francs  June  1st,  had  the  satisfaction  of  seeing  their  stock  after 
doubling  quoted  at  3050  on  June  29th.  The  three  per  cents,  received 
by  the  Bank  are  not  to  be  sold,  and  now  appear  among  its  resources 
as  "Rentes  immobilise'es  (Loi  de  9  Juin,  1857)  100,000,000  francs." 

'  This  surplus,  which  is  set  down  in   the  published  accounts  as 


122  CHAPTERS   ON   BANKING. 

The  years  from  1857  to  1870,  although  marked  by 
great  changes,  both  in  the  poUtical  world  and  the 
financial,  hardly  witnessed  any  event  in  the  history 
of  the  Bank  of  France  which  needs  to  be  noticed 
here/  But  with  the  opening  of  the  Franco-German 
The  war  ^^^  ^^  J ^^7?  ^^7^y  t^c  Bank  entered  upon 

with  Germany  the  most  remarkable  period  of  its  exist- 
*"  ^  ^^'  ence, — that  in  which  its  vicissitudes  were 

most  startling  and  critical,  its  services  to  the  country 
most  distinguished,  and  the  success  of  its  manage- 
ment most  brilliant. 

Three  weeks  before  the  breaking  out  of  hostilities 
the  Bank  of  France  had  in  its  vaults  an  amount  of 
cash  almost  equal  to  its  notes,  and  amounting  to 
nearly  two  thirds  of  all  its  cash  liabilities.''  The 
approach  of  war  caused  a  heavy  pressure  upon  the 
Bank  for  loans,   and    both    notes    and   specie  were 

**  Benefices  en  addition  au  capital  (art.  7,  Loi  de  9  Juin,  1857) "  has 
stood  at  8,002,314  francs  since  1874. 

^  Perhaps  an  exception  should  be  made  of  the  unexpected  claim  set 
up  by  the  Bank  of  Savoy  in  1864,  which  for  a  moment  seemed  to 
threaten  the  monopoly  of  the  Bank  of  France.  The  Bank  of  Savoy 
had  by  its  old  statutes  the  right  to  issue  notes  and  to  establish  branches  ; 
the  treaty  of  annexation  saved  all  existing  rights  of  corporations  in  the 
annexed  territory  ;  and  on  this  reasoning  it  was  proposed  to  raise  the 
capital  of  the  Bank  of  Savoy  from  4,000,000  francs  to  40,000,000  francs, 
to  open  branches  and  issue  notes.  The  project  was  favored  by  many 
opponents  of  the  monopoly  of  note  issue,  and  was  formidable  enough 
to  lead  the  Bank  of  France  to  make  the  payment  of  4,000,000  francs 
for  the  surrender  of  the  asserted  rights.  For  notices  of  this  episode 
see  Courtois,  Histoii'e^  p.  245;  Economist^  January  16,  1864; 
D'Eichthal,  Monnaie  de  Papier  et  Banques  d' Emission^  p.  84. 

*''  The  chief  movements  in  the  account  of  the  Bank  of  France, 
caused  by  the  war,  can  be  seen  in  the  following  table,  given  in 
millions  and  tenths  : 


I 


THE   BANK   OF   FRANCE.  I23 

drawn  from  it  in  large  amounts,  and  began  to  find 
their  way  either  into  private  hoards  or  into  foreign 
hands.  Neither  the  government  nor  the  public 
could  see  with  patience  this  dispersion  of  a  stock 
of  specie  which,  it  was  felt,  might  be  an  important 
resource  in  the  desperate  struggle  with  Germany, 
and  suspension  of  payment  as  a  precautionary  step 
thus  became  probable  early  in  August.  Shortly 
afterward  the  government  resolved  upon  the  adop- 
tion of  a  measure  suspending  the  collection  of  com- 
mercial obligations,  and  this  made  the  suspension  of 
the  Bank  a  necessity.  On  the  12th  of  August,  then, 
four  weeks  from  the  beginning  of  the  war,  g^^  ension 
a  law  was  passed,  as  a  government  meas-  authorized, 
ure,  and  with  but  one  dissenting  vote  in  "^*  "*  ^  ^°' 
each  house,*  authorizing  the  Bank  to  refuse  payment 
of  its  notes  in  specie,  and  for  the  second  time  in  its 
history  making  its  notes  a  legal  tender  for  debts 
public  and  private.  The  issue  was  at  the  same  time 
limited  to  1,800,000,000  francs,  and  authority  was 
given  for  the  emission  of  notes  as  small  as  25  francs 
each.  On  the  next  day,  August  13th,  was  passed 
the  first  of  the  measures  which  postponed  all  com- 

Notes.     Deposits. 

1870,  June  23  .  .  1,374.  431.9 
Aug.  II  .  .  1,583.6  582.2 
Sept.  8        .     .     1,745.       441.8 

1871,  June  29       .     .     2,213.       524.1 
June  23d  was  the  day  when  the  cash  was  at  its  maximum  for  1870  ; 

August  nth  was  the  day  before  the  suspension  ;  no  account  was 
published  between  September  8,  1870,  and  June  29,  1871. 

^  In  the  Senate  the  solitary  negative  vote  was  given  by  Michel 
Chevalier.  For  the  laws  noticed  in  the  text  see  Journal  Officiel^ 
1870,  Aug.  13,  14,  15,  or  Bulkiindes  Lois. 


Disc'd 

Public 

Cash. 

Paper. 

Loans, 

1,318.5 

558.1 

1,028.6 

1,181.7 

808. 

1,428.3 

549-8 

741.9 

1,403 

124  CHAPTERS   ON   BANKING. 

mercial  debts  for  one  month,  and  then,  by  successive 
extensions  of  time,  until  July,  1871,  without  other 
burden  to  the  debtor  than  liability  for  interest  until 
the  final  payment.*  And  finally,  on  the  14th  of 
August,  the  limit  of  issues  by  the  Bank  was  raised 
to  2,400,000,000  francs,  on  the  ground  that  for  the 
Bank  to  continue  its  discounts  it  must  have  a  wider 
margin  than  was  allowed  by  the  law  of  the  12th. 
This  completed  the  series  of  measures  under  the 
authority  of  which  the  Bank  was  administered  during 
the  war. 

The  state  had  at  the  outbreak  of  the  war  obtained' 
a  small  advance  from  the  Bank,  and  called  for  others 
soon  after  the  suspension.  During  the  siege  of  Paris 
Loans  made  the  branch  of  the  Bank  at  Tours  became 
to  the  gov-     the  agency  by  which  considerable  advances 

ernment.  .  ,  ... 

were  made  to  the  provisional  government 
at  Tours,  while  the  Bank  itself  was  in  like  manner 
aiding  the  government  in  Paris.  When  the  war 
with  the  Commune  succeeded  that  with  Germany, 
these  advances  had  risen  in  all  to  761,000,000  francs, 
besides  a  loan  of  210,000,000  francs  to  the  city  of 
Paris.  The  Bank  resisted  with  great  difficulty  the 
efforts  of  the  Commune  to  use  its  resources  in  de- 
fence of  the  city,  and  for  several  weeks  escape  from 
open  pillage,  or  from  demands  not  to  be  distinguished 
from  it,  seemed  hopeless.  The  prudence  of  the 
managers,  the  devotion  of  their  subordinates,  and 

*  Under  the  operation  of  this  law  the  Bank  of  France  held  sus- 
pended paper  to  the  amount  of  nearly  870,000,000  francs.  Of  this 
more  than  two  thirds  was  paid  in  before  the  expiration  of  the  legal 
terra  of  indulgence  ;  and  of  principal  and  interest  less  than  one  per 
cent.  wasstiU  unpaid  at  the  end  of  1874.     Courtois,  Histoire^  p.  263. 


THE    BANK    OF    FRANCE.  1 2$ 

the  steady  support  of  one  or  two  members  of  the 
revolutionary  body  itself,  carried  the  Bank  safely 
through  the  most  dangerous  episode  of  its  history, 
and  enabled  it,  upon  the  suppression  of  the  Com- 
mune, once  more  to  give  its  aid  freely  to  the  govern- 
ment/ In  July,  1 87 1,  the  loans  thus  made  to  the 
state  amounted  in  all  to  1,425,000,600  francs,  and 
the  government  now  happily  found  itself  in  such  a 
position  that  it  could  cease  drawing  from  this  source.* 
The  brief  statement  given  on  p.  123  shows  dis- 
tinctly enough  the  change  which  a  year  of  war  had 
wrought  in  the  affairs  of  the  Bank.  An  enormous 
loan  had  been  made  to  the  state  simultaneously 
with  an  increase  of  discounts  for  individuals,  and 
this  had  been  effected  partly  by  the  sacrifice  of 
cash  and  partly  by  an  increase  of  notes,  the  volume 
of  which  now  stood  nearly  800,000,000  francs  above 
the  highest  point  ever  before  reached.  This  increase 
of  notes  had  been  managed  with  great  caution,  so 
that  while  it  necessarily  expelled  from  circulation  a 
considerable  amount  of  specie,  it  had  Ljttiede  re- 
nevertheless  brought  about  but  a  slight  ciation  of  the 
depreciation  of  the  paper  ' ;  and  with  the  ^^"^■"°*^^- 
repayment  by  the  government  of  the  advances  made 
to  it  by  the  Bank,  the  restoration  of  specie  payment 

'  For  minute  details  of  the  history  of  the  Bank  under  the  Com- 
mune, and  of  the  means  by  which  it  was  saved,  see  Du  Camp,  Les 
Convulsions  de  Paris ^  iii.,  ch.  ii. 

^  In  the  Bulletin  de  Siaiistique  et  de  Legislation  Compare'e  for  April 
and  May,  1880,  is  a  careful  report  upon  these  loans  and  upon  their 
subsequent  payment. 

2  During  the  war  quotations  were  made  of  exchange  on  London  and 
occasionally  of  gold,  indicating  in  one  extraordinary  case  a  premium 


126  CHAPTERS   ON   BANKING. 

/promised  to  be  easy.  The  government,  however, 
was  for  the  time  in  no  condition  to  undertake  the 
payment  of  a  domestic  deJbt.  It  had  before  it  the 
problem  of  paying  to  Germany,  in  the  next  two  or 
three  years,  the  great  indemnity  of  five  thousand 
milHons  of  francs,  to  which  it  was  bound  by  the 
treaty  of  peace  ;  it  had  yet  to  learn  how  far  its  credit 
would  enable  it  to  make  this  payment  by  borrowing 
in  the  general  market,  and  the  most  that  could  be 
hoped  was  that  it  should  not  have  to  call  upon  the 
Bank  for  further  aid.  The  latter  could  not  expect, 
therefore,  for  several  years  to  come,  to  extricate  the 
resources  which  it  had  lent  to  the  state. 

^  But  while  the  Bank  thus  saw  its  resources  unavail- 
able for  a  movement  towards  specie  payments,  it  was 
also  called  upon  to  increase  at  once  the  assistance 
given  by  it  to  commerce.  It  was  of  paramount 
necessity  that  productive  industry  should  resume  its 
activity  without  delay,  for  it  was  after  all  in  the  pro- 
duction of  wealth  and  its  proper  use  that  France 
must  find  the  means  of  escape  from  the  economic 
misery  caused  by  the  war,  and  it  was  the  thrift  and 
prosperity  of  individuals  that  must  support  the 
credit,  on  which  the  country  now  relied  in  making  its 
settlement  with  Germany.  Special  precaution  was 
needed  also  to  insure  industry  from  being  starved  of 

of  four  per  cent,  on  specie.  After  the  restoration  of  order  gold 
ceased  to  be  quoted,  and  the  price  of  exchange  on  London  fell  to  a 
level  of  about  i  per  cent,  premium.  See  the  Economist  for  quota- 
tions both  in  London  and  in  Paris.  Leon  Say's  Rapport  stir  le 
Payement  de  V Indemnity  de  la  Guerre  gives  a  chart  showing  the  rates 
of  exchange  in  Paris  on  London  from  June,  187 1,  to  September, 
1873. 


THE   BANK    OF   FRANCE.  12/ 

its  needed  supplies  of  capital,  while  the  government 
was  borrowing  the  vast  sum  to  be  paid  to  Germany. 
The  Bank  therefore  took  the  bold  course  increase  of 
of  rapidly  enlarging  its  discounts  and  ad-  'YoYns^after 
vances  to  individuals  ;  and  to  make  this  peace, 

possible,  in  a  country  where  deposit  accounts  and 
checks  are  but  little  used,  it  was  authorized  in  De- 
cember, 1 871,  to  increase  its  issue  of  notes  to  not 
more  than  2,800,000,000  francs,*  and  in  July,  1872, 
the  limit  was  further  extended  to  3,200,000,000.' 
Such  an  increase  of  paper  with  a  forced  circulation 
required,  as  the  condition  of  possible  safety  from 
serious  deprecation,  a  further  expulsion  of  specie 
from  use.  The  smallest  notes  thus  far  issued  by  the 
Bank  were  notes  for  20  francs  authorized  by  a  law  of 
December,  1870;  but  the  law  of  December,  1871, 
raising  the  limit  of  the  total  issue  of  notes,  now 
authorized  the  issue  of  notes  as  low  as  5  francs,  and 
thus  facilitated  the  introduction  of  the  bank  paper  into 
all  the  channels  of  circulation,  small  as  well  as  great. 

With  the  ground  thus  prepared,  the  great  scheme 
for  the  simultaneous  payment  of  Germany  and  revi- 
val of  France  was  carried  through.  The  government 
borrowed  in  all  the  markets  of  Europe,  to  facilitate  . 
including  that  of  Germany,  but  called  indYi^nityto 
upon  the  Bank  of  France  for  nothing  Germany, 
more  than  two  or  three  temporary  advances,  not 
large  in  amount  and  soon  repaid.    The  Bank  doubled 

*  Journal  Officiel,  1871,  p.  5373  ;  Bulletin  des  Lois^  T.  253,  p.  504. 

2  Journal  Officiel,  1872,- p.  4969  ;  Bulletin  des  Lois^  T.  257,  p.  39. 
The  provision  is  contained  in  article  4  of  the  law  for  a  national  loan  of 
three  milliards,  and  declares  that  "  le  chiffre  des  emissions  desbillets 
...  est  eleve  provisoirement  a  trois  milliards  deux  cents  millions." 


128  CHAPTERS    ON    BANKING. 

its  discounts  of  commercial  paper  for  the  next  three 
years,  and  for  this  purpose  increased  the  note  circu- 
lation until  at  its  maximum  at  the  end  of  October, 
1873,  it  nearly  reached  3,072,000,000  francs.  From 
the  data  subsequently  published  it  appears  that  the 
whole  of  the  increase  was  made  by  the  issue  of 
notes  of  not  above  100  francs,  and  the  greater  part 
of  it  by  means  of  notes  of  50  francs  and  less.^  The 
risks  of  the  operation  were  amply  compensated  by 
its  gains.  Although  the  government,  in  view  of  the 
valuable  privilege  enjoyed  by  the  Bank  of  making  a 
great  issue  of  notes  without  the  obligation  of  pay- 
ment, reduced  to  one  per  cent,  the  interest  on  its 
own  debt  to  the  Bank,  the  profits  from  the  immense 
increase  of  discounts  were  heavy.  A  dividend  of 
20  per  cent,  for  the  second  half  of  1871,  32  per  cent, 
for  1872,  and  35  per  cent,  for  1873,  amply  justified 
the  conduct  of  the  management  in  the  eyes  of 
stockholders,  and  once  more  proved  that  in  periods 
of  specie  suspension  no  trade  flourishes  like  that  of 
the  dealers  in  credit. 

The  government  was  able  in  1872  to  begin  its  pay- 
ment to  the  Bank  at  the  rate  of  200,000,000  francs 
per  year  ;  the  payment  of  the  indemnity  to  Germany 
Preparations  ^as  Completed  iu  August,  1873,  and  in 
for  resumption  1 874  the  Bank  began  its  preparations 
egm,  I  74.  £^j.  ^YiQ  resumption  of  specie  payment. 
France,  having  a  less  expanded  state  of  credit  than 
most  other  commercial  countries,  had  felt  the  revul- 

^  Economist  for  1872,  p.  326  ;  the  same  for  1874,  p.  320. 

In  the  Bulletin  de  Statistique  for  May,  1887,  p.  510,  is  a  table  of 
the  annual  maximum  and  minimum  circulation  of  every  denomination 
of  notes,  and  of  the  annual  ap^jTrerates,  from  1S66  to  1886. 


THE    BANK   OF   FRANCE.  1 29 

sion  of  1873  but  little,  and  it  was,  therefore,  possible 
to  make  a  large  reduction  in  the  discounts  of  the 
Bank,  and  thus  to  carry  on  the  double  operation  of 
accumulating  specie  and  withdrawing  notes.  The 
withdrawal  of  small  notes  of  25  francs  and  less 
was  carried  on  even  faster  than  the  general  reduction 
of  the  circulation,  in  order  to  force  the  introduction 
of  specie  into  general  use  and  thus  to  insure  the 
presence  of  a  large  mass  of  metal  in  the  hands  of  the 
public  before  the  Bank  should  begin  its  payments. 
The  specie  in  the  Bank  reached  its  highest  point  in 
June,  1877,  when  it  stood  at  2,281,000,000  francs, 
showing  an  accumulation  by  the  Bank  of  over 
1,500,000,000  francs  in  three  years  and  a  half,  inde- 
pendently of  any  made  by  the  public.  Of  this 
specie,  not  far  from  sixty  per  cent,  was  gold,  it  being 
the  policy  of  the  Bank  to  hold  much  gold,  partly 
because  gold  alone  could  answer  demands  for  use  in 
foreign  trade,  and  partly  because  of  the  uncertainty 
which  obscured  the  future  value  of  silver.' 

^  In  the  Bulletin  de  Siatistique  for  January,  1887,  p.  60,  is  a  table 
showing  the  annual  maximum  and  minimum  of  specie  in  the  Bank  of 
France,  distinguishing  gold  and  silver,  from  1811  to  1886. 

It  has  often  been  said  that  for  a  few  years  before  1879  the  great 
nations  were  **  grasping  for  gold,"  in  a  momentary  panic  caused  by 
the  introduction  of  the  gold  standard  in  Germany.  A  little  examina- 
tion will  show,  however,  that  the  great  demands  Tor  gold  by  Ger- 
many, France,  and  the  United  States  came  in  succession  and  not 
simultaneously,  and  were  met  without  disturbance.  While  the 
French  accumulation  was  going  on  in  the  years  1874  to  1877  inclu- 
sive, that  sensitive  barometer,  the  Bank  of  England  rate,  averaged 
3/^.  pex  cent.  During  the  four  years  it  rose  but  once  as  high  as  6, 
and  then  for  only  38  days,  and  was  above  4  for  only  124  days  alto- 
gether. These  low  rates  are  not  observed  when  nations  ar«  '*  g^'flti^ 
ing  "  for  specie, 
9 


1 2,0  CHAPTERS   ON   BANKING. 

The  precise  period  at  which  specie  payments 
should  be  resumed  was  determined  by  the  law  "of 
August  3,  1875,  i^  which  it  was  provided  that  when 
the  advances  made  by  the  Bank  to  the  State  should 
have  been  reduced  to  300,000,000  francs,  payment  of 
the  notes  in  specie  should  begin/  By  the  end  of 
1876  only  338,000,000  francs  remained  unpaid,  and  it 
would  not  have  been  difficult  at  any  time  in  1877  to 
complete  the  operation.  The  year  was  permitted  to 
pass,  however,  without  taking  the  final  step,  the 
Bank  in  the  meantime  de:i^iing  upon  the  specie  basis. 
A  payment  of  10,000,000  francs,  which  lowered  the 
Resumption  government  debt  to  the  required  point, 
effected  easily,  was  at  last  xTiside /?ro  forma  December  31, 
Jan.  I,  I  7  .  1877,'  and  specie  payment  was  resumed 
with  the  opening  of  the  new  year,  without  shock  and 
without  much  thought  on  the  part  of  the  public. 
By  the  terms  of  the  law  the  notes  continued  to  be  a 
legal  tender  for  all  debts,  as  they  are  to-day,  but 
their  forced  circulation  by  non-payment  was  at  an 
end.  It  is  also  to  be  observed  that  as  the  law  for 
resumption  did  not  disturb  the  previous  legislation 
which  had  fixed  the  limit  of  note  circulation  for  the 
Bank  at  3,200,000,000  francs,  the  Bank  of  France, 
for  the  first  time  in  its  history,  has  the  function, 
when  paying  in  specie,  of  issuing  a  legal-tender 
paper  of  limited  quantity.' 

*  See  article  28  of  the  Budget  for  1876,  in  Journal  Officiel^  1875, 
p.  6866  ;  also  Bulletin  des  Lois, 

2  The  final  installment  of  the  debt  was  paid  March  14,  1879.  See 
the  Bulletin  de  Statistique^  cited  above  on  page  125. 

^  The  limit  of  circulation  was  raised  to  3,500,000,000  francs,  by- 
article  8  of  the  Budget  Act  of  1884.     Bulletin  des  Lois. 


THE   BANK   OF   FRANCE.  I3I 

At  the  moment  of  resumption  the  notes  of  the 
Bank  remaining  in  circulation  amounted  to  nearly 
2,462,000,000  francs.  This  was  a  heavy  reduction 
from  the  maximum  reached  in  1873,  but  it  was  still 
nearly  double  the  usual  circulation  for  the  years 
before  the  war.  The  free  choice  between  specie  and 
paper  after  resumption  led  to  but  little  diminution 
of  the  issues,  so  that  as  the  result  France  may  be 
said  to  have  adopted  a  permanently  larger  paper 
circulation.  In  part  this  is  no  doubt  due  to  a  con- 
siderable expansion  of  affc  .rs,  calling  for  an  ampler 
circulating  medium ;  but  i.i  still  greater  part  it  is  no 
doubt  the  effect  of  a  change  of  habit  generally  pro- 
duced by  any  protracted  use  of  forced  paper, — a 
change  which  makes  it  highly  improbable  that  any 
nation,  after  such  an  experience,  will  easily  return  to 
the  use  of  paper  and  coin  in  the  same  proportions 
which  it  once  found  satisfactory. 


CHAPTER  IX. 

THE  NATIONAL   BANKS   OF    THE   UNITED   STATES. 

Advancing  from  the  simplest  type  of  the  modern 
bank  of  issue,  represented  by  the  Bank  of  France, 
we  come  to  the  case  where  the  government  seeks  to 
protect  the  circulating  notes  of  the  bank,  by  requir- 
ing the  pledge  of  property  for  their  redemption. 
The  best  ^^  ^^^^  systcm,  the  National  Banks  of  the  . 
type  of  se-  United  States  are  the  best  representatives. 
The  legislation  which  establishes  them 
prescribes  many  details  of  administration,  and  un- 
foreseen circumstances  have  checked  the  natural  de- 
velopment of  their  circulation  ;  but  they  present  the 
aystem  of  secured  currency  in  its  least  complex  form 
and  under  circumstances  which  have  given  it  great 
historical  importance. 

The  national  banking  system  owes  its  existence 
to  the  civil  war.     Although  in  the   majority  of  th 
States  the  banks  incorporated  under  State  authori  y 
were   badly  organized  and  insecure,  and   although 
even  such  as  were  on  a  solid  foundation  could  enjoy 
only  a  restricted  local  credit,  the  current  of  opini  ^f 
before  the  war  was  by  no  means  favorable  t< 
consolidation  of  banking  interests.     Discontenr   .^i 
existing  systems  more  frequently  took  the  fern.  . 

132 


NATIONAL    BANKS    OF   THE    UNITED    STATES       .  ^3 

opposition  to  the  existence  of  any  banks  of  is  .  .^i 
all ;  the  party  then  apparently  holding  permanent 
control  of  the  national  administration  cherished  with 
pride  the  traditions  of  its  victorious  struggle  with 
the  United'  States  Bank,  and  of  its  devotion  to  a 
gold  currency  ;  and  probably  neither  the  friends  nor 
the  opponents  of  banking  would  have  thought  at 
that  time  of  finding  in  the  government  of  the  United 
States  a  power  able  to  reorganize  upon  a  common 
plan  the  note  issues  of  all  the  States. 

The  imperious  necessity  of  finding  a  marke  ''or 
United  States  bonds  for  the  supply  of  a  Treasury 
drained  by  war  was  the  favoring  condition  neec  ■! 
for  such  a  reorganization,  and  the  assumptic 
unusual  powers  by  the  United  States  government, 
which  was  becoming  habitual  under  the  pressure  of 
a  struggle  for  existence,  made  the  resort  to  federal 
authority  practicable.  In  i860  a  majority  of  the 
people  would  have  thought  the  establishment    <f  a 

ird  United  States  bank  dangerous  and  of  dc 

^utionality.     In    1863   e^.  system   of    n?^ 
..Lc,   indefinitely  more   powcriul   than   the 

lich  waged  an  almost  equal  war  with  Jackson, 

'ablished    witl-    widespread,   although   not    i; 
>.jOUs,  consent,  and  without  solid   opposition,  c  ; 
from  some  existing  mterests  threatenea  or  alar 
by  the  change.     It  was,  indeed,  urged  by  some  1  hci.:, 
as  the  wants  of  the  Treasury  were  the  real  con    'i- 
ling  motive  in  the  establishment  of  the  new  sys 
it  would  be  better  for  the  government  to  issu     ;ts 
own  notes  to  the  extent  of  the  proposed  bank  ecu- 
lation,  and  to  occupy  the  whole  of  the  field,  of  which 


134  CHAPTERS   ON   BANKING. 

it  had  already  taken  a  part,  and  so  enjoy  the  full 
advantage  of  a  non-interest-bearing  debt.  Fortu- 
nately these  views  gained  little  support,  and  the 
dangerous  expedient  of  obtaining  funds  by  the  issue 
of  government  notes  was  not  pushed  beyond  the 
limit  of  possible  return  to  specie  payment.* 

The  adoption  of  a  system  of  national  banks,  having 
their  notes  secured  by  the  deposit  of  United  States 
Adoption  of  bonds,  had  been  proposed  by  the  Secre- 
the  system,  tary  of  the  Treasury  in  1861,  and  strongly 
.25,1  3.  m-gg(^  lyy  i^i^  [^  1862.  An  act  for  the 
purpose  was  passed  in  February,  1863,'*  but  in  many 
points  of  detail  this  proved  to  be  so  unsatisfactory 
anrd  incomplete,  that  only  134  banks  were  organized 
under  it  in  the  next  nine  months  and  the  number  had 
risen  to  less  than  450  in  sixteen  months.  A  revised 
act,  making  important  changes,  was  therefore  passed 
in  June,  1864,^  and  ample  provision  having  been 
made,  under  which  banks  chartered  by  the  States 
could  be  reorganized  as  national  banks,  the  exten- 
ihe  new  system  went  on  rapidly.  Its  adop 
.  v.i.^  fui-ther  stimulated  by  an  act  laying  a  taxo: 
'  n  per  cent,  on  all  notes  of  State  banks  paid  out  by 
a  : -  bank  after  July  i,  1866/  The  certainty  of  th 
piactical  exclusion  of  all  State  banks  from  the  fielr 
of  circulaiion,  caused  the  speedy  reorganization  c 
the  greater  part  of  them  as  national  banks  ;  and  thus 

^  See  Report  on  the  National  Bank  Currency  Act,  written  by  the  late 
John  E.  Williams,  and  made  to  the  New  York  Clearing-House  banks, 
November  28,  1863. 

*  12  Statutes  at  Large,  665. 

*  13  Statutes  at  Large,  99. 

*  13  Ibid,  484, 


NATIONAL   BANKS   OF   THE    UNITED    STATES.      1 35 

the  national  system,  numbering  1,634  banks  on  July 
I,  1866,  at  once  assumed  the  pre-eminence  which  it 
has  easily  maintained. 

There  is  no  doubt  that,  in  adopting  the  national 
bank  system,  Congress  understood  that  intended  fl- 
it was  establishing  the  agency  by  which  naiiytosup- 
the  sole  paper  currency  of  the  country  paper  cur- 
should  be  issued  in  the  future.  The  legal-  rency. 
tender  issues  were  still  regarded  as  a  temporary  expe- 
dient, resting  upon  the  overwhelming  exigency  of 
the  moment  for  their  justification  ;  the  bank  act  is 
entitled  ''  An  act  to  provide  a  national  currency,** 
emphasizing  by  its  title  the  permanence  of  the  sub- 
stitute which  was  to  fill  the  place  left  vacant  when 
the  legal-tender  notes  should  be  paid  ;  and  the  text 
of  the  act  plainly  looks  forward  to  the  return  of 
specie  payment,  which  should  leave  specie  the  only 
tender  for  debt.*  Establishing  a  permanent  system 
of  banks,  Congress  undertook  to  surround  them  by 
the  ordinary  safeguards  needful  to  give  General 
them  full  credit,  providing  minutely  for  safeguards, 
their  organization  and  superintendence,  and  for  the 
publication  of  their  accounts  at  rather  short  inter- 

'  In  1870,  when  the  return  to  specie  payments  finally  seemed  to 
have  been  postponed  indefinitely,  an  act  was  passed  authorizing  the 
establishment  of  gold  banks,  issuing  notes  redeemable  in  gold  coin, 
and  secured  by  the  deposit  of  "  United  States  bonds  bearing  interest 
payable  in  gold  "  with  the  treasurer  of  the  United  States.  The  notes 
were  not  to  exceed  eighty  per  cent,  of  the  value  of  the  bonds,  and 
were  not  to  be  subject  to  those  provisions  of  law  which  then  limited 
the  aggregate  circulation  of  bank-notes.  Several  gold  banks  were  or- 
ganized, chiefly  in  the  Pacific  States  ;  but  after  the  return  to  specie 
payments,  the  distinction  between  the  gold  banks  and  others  ceasing 
to  be  of  importance,  provision  was  madg  by  the  act  of  iSSq  for  their 


136  CHAPTERS    ON    BANKING. 

vals/  and  laying  down  rules,  wholesome  so  far  as 
they  go,  restricting  the  kinds  of  business  in  which 
the  banks  should  engage.  It  was  provided  also  that 
the  shareholders  should  be  responsible  ratably  for  the 
debts  of  the  banks,  each  to  the  amount  of  his  st6ck 
in  addition  to  the  capital  actually  invested  by  him.'* 
A  system  of  banks  thus  guarded  and  under  the 
charge  of  the  government  itself  could  hardly  be 
treated  by  Congress  as  unworthy  of  being  Entrusted 
with  the  public  funds,  as  the  State  banks  had  been 
under  the  Independent  Treasury  Act  of  1846, 
and  provision  was  therefore  made  for  designating 
and  public  banks  as  depositories  of  public  money 
functions  of  when  occasion  .  should  require,  and  for 
their  employment  as  financial  agents  of 
the  government,  upon  their  giving  satisfactory  se- 
curity, by  the  deposit  of  United  States  bonds  and 
otherwise,  for  the  faithful  discharge  of  these  func- 
tions. The  framers  of  the  measure  no  doubt  looked 
forward  at  one  time  to  a  more  consolidated  system  of 
banks,  and  to  a  closer  intimacy  with  the  government 

conversion  into  national  banks  of  the  usual  type,  and  there  are  now 
no  national  gold  banks  in  existence.  21  Statutes  at  Large ^  66. 
Compt7-oller  s  Report^  1890,  p.  53. 

^  A  summary  statement  of  the  number  and  condition  of  the  national 
banks,  at  five  dates  in  every  year,  and  for  every  year  since  the  adopts 
tion  of  the  system,  is  given  annually  in  the  Report  of  the  Comptroller 
of  the  Currency. 

'^  From  this  liability  to  contribution  beyond  the  amount  invested, 
the  law  made  an  exception  in  favor  of  the  stockholders  of  any  existing 
State  bank,  having  a  capital  of  not  less  than  five  millions  and  a 
surplus  of  twenty  per  cent. ,  in  case  of  its  reorganization  as  a  national 
bank.  This  exception  was  made  in  order  to  secure  the  adhesion  of 
the  Bank  of  Commerce  of  New  York  City, — the  only  bank  in  the 
United  States  which  could  meet  these  conditions. 


NATIONAL   BANKS   OF   THE    UNITED    STATES.      1 37 

than  was  in  fact  established  ;  but  their  action  as  it 
stands  marks  an  extraordinary  change  of  policy, 
made  under  the  pressthre  of  war,  by  a  government 
which,  hardly  more  than  two  years  before,  trusted  no 
agency  whatever  with  the  custody  of  its  funds,  rec- 
ognized no  medium  of  payment  except  specie,  and 
carefully  disclaimed  all  connection  with,  or  responsi- 
bility for,  any  possible  system  of  banks. 

The  general  provisions  of  the  national  banking 
system*  have  for  their  starting-point  the  restriction 
of  the  right  of  note-issue  to  national  banks,  the 
other  functions  of  banking  being  left  free  for  banks 
chartered  by  State  authority,  and  for  private  banks. 
Any  national  bank,  proposing  to  issue  notes,  is  re- 
quired to  secure  them  by  a  deposit  of  registered 
bonds  of  the  United  States,  the  bonds  ^^^  method 
being  transferred  to  and  held  by  the  of  securing 
Treasurer  at  Washington,  but  the  inter- 
est thereon  collected  by  the  bank,  whose  prop- 
erty the  bonds  continue  to  be.^  The  deposit  of 
bonds  under  these  provisions  entitles  the  bank  mak- 
ing such  deposit  to  receive  from  the  Comptroller  of 
the  Currency,  who  has  the  general  charge  of  the  sys- 
tem, notes  to  the  amount  of  ninety  per  cent,  of  the 

^  The  legislation  on  this  subject  down  to  1873  is  embodied  in 
§§  5133-5243  of  the  Revised  Statutes  of  1878.  The  subsequent  acts 
of  importance  are  the  Compromise  act  of  1874,  18  Statutes  at  Large ^ 
123;  the  Resumption  act  of  1875,  Ibid.,  296;  the  act  of  1880  con- 
cerning gold  banks,  21  Id,,  66  ;  the  act  of  1882  extending  the  exist- 
ence of  the  banks,  22  Id.,  162  ;  the  act  of  1887  providing  for  a  class 
of  central  reserve  cities,  24  Id.,  559  ;  and  the  silver-bullion  act  of 
1890,  making  further  provision  as  to  the  redemption  of  bank-notes, 
26  Id.,  289. 


138  CHAPTERS   ON   BANKING. 

market  value  of  the  bonds  deposited,  but  not  exceed- 
ing ninety  per  cent,  of  their  par  value.  These  notes 
when  received  are  in  blank,  certifying  only  the  fact 
that  the  security  for  them  is  in  the  hands  of  the 
government ;  but  when  signed  by  the  proper  officers 
of  the  bank,  they  become  its  promises  to  pay  upon 
demand,  and  can  then  be  issued  for  circulation. 
The  effect  of  this  arrangement,  it  will  be  seen,  is 
simply  that  a  sufficient  amount  of  the  property  of 
the  bank,  required  to  be  held  in  the  idjfm  of  bonds, 
is  pledged  with  proper  safeguards  to  insure  the  ulti- 
mate payment  of  all  notes  issued  by  the  bank.  The 
notes  are  also,  of  course,  to  be  paid  by^the  issuing 
bank  whenever  presented,  are  to  be  received  in  pay- 
ment by  all  other  national  banks,  and  can  be  paid  to 
or  be  used  in  payments  by  the  government  in  all 
cases  where  specie  is  not  required  by  law  ;  but  they 
have  never  been  a  legal  tender  as  between  individuals. 

These  provisions  have  secured  for  the  notes  a  uni- 
form value  and  give  to  those  of  every  bank  an  un- 
impeded circulation  in  every  part  of  the  Union,  If, 
indeed,  the  law,  as  in  the  act  of  1863,  still  made  no 
further  provision  for  redemption  than  to  require 
every  bank  to  redeem  its  own  notes  when  presented 
at  its  own  counter,  the  return  of  notes  for  payment 
would  rarely  take  place  and  their  substantial  conver- 
tibility would  be  nearly  destroyed.  But  the  law  of 
Provisions  1 864  made  provision  for  redemption  by 
for  central      all  bauks  at  agcncics  in  the  principal  cities, 

emp  ion.  ^^^  ^j^.^  arrangement  continued  in  force 
until  June,  1874,'  when  the  present  sy'stem  was 
adopted^  making  the  Treasury  of  the  United  States* 

^  18  Statutes  at  I^rge,  123. 


NATIONAL   BANKS    OF   THE    UNITED    STATES.       1 39 

the  sole  redeeming  agency  for  all  of  the  national 
banks,  and  requiring  every  bank  to  maintain  in  the 
Treasury,  to  be  used  in  redemption  of  its  notes,  a  I 
reserve  equal  to  five  per  cent,  of  its  circulation.  | 
Thus  far,  however,  the  chief  effect  of  the  present 
system  of  redemption,  except  in  the  case  of  insolvent 
banks  or  of  banks  reducing  their  issues,  has  been 
the  easy  removal  from  circulation  of  notes  which  are 
worn,  soiled,  or  otherwise  unfit  for  use.  For  the 
establishment  I  of  a  system  which  should  test  efTec- 
tively  and  continuously  the  power  of  every  bank  to 
convert  its  notes  into  specie  on  demand,  it  would 
probably  b^  necessary  to  require  that  no  national 
bank  should  pay  out  any  notes  except  its  own.*  For 
the  general  purpose  of  maintaining  the  convertibility 
of  the  aggregate  note-issue  of  the  banks  and  its  ready 
diminution  when  required  by  the  condition  of  busi- 
nesslike present  arrangement  is  well  devised. 

Tfie  national  bank-note  when  issued  is  the  promise 
of  tne  issuing  bank,  and  must  be  punctually  met  by 
it,  when  payment  is  required,  as  any  other  liability 
must  be.  The  note,  however,  now  carries  with  it 
certain  engagements  bidding  upon  the 
government  (nf  the  United  States.  The  ment's  liabii- 
provision  for  redemption  at  the  Treasury  ityforthe 
binds  the  governmept  to  pay  on  demand 
all  notes  when  presented  in  due  form,  and  not  merely 
notes  to  the  extent  of  the  reserve.     And  in  case  of 

^  Such  a  prohibition  was  the  basis  on  which  the  **  Suffolk  bank 
system"  of  New  England  rested,  from  18 19  to  1866,  and  maintained 
at  par  a  note' circulation  which  had  otherwise  but  slender  provision 
for  convertibility.  Massachusetts  Qeneral  Statutes  of  i860,  ch.  57, 
§  55  ;  but  compare  also  g  124.  And  see  Ip.  |^.  Whitney,  The  Suffolk 
Bank.  Qj)    iWyVi    ■  l-j^,U 


140  CHAPTERS    ON    BANKING. 

the  failure  of  a  bank,  the  law  provides  for  the  imme- 
diate redemption  of  all  its  notes  at  the  Treasury. 
-The  government  has  thus  made  itself  fully  liable  in 
any  event  for  the  whole  amount  of  the  notes.  On 
the  other  hand,  it  has  taken  ample  security  for  its 
reimbursement,  by  requiring  the  deposit  of  bonds  as 
above  stated,'  by  requiring  that  this  deposit  shall  be 
increased  if  the  value  of  the  bonds  declines,  by  the 
provision  for  a  reserve  of  cash  to  be  held  by  the 
Treasury,  and  also  by  taking  for  itself  a  first  lien 
upon  all  the  assets  of  a  bank  and  upon  the  personal 
liability  of  the  stockholders,  for  the  purpose  of  mak- 
ing good  any  possible  deficiency  in  the  security  al- 
ready provided.  An  ingenious  provision  in  the  act 
of  1882  also  secures  for  the  gpverruneiit  any  gain 
that  may  ultimately  accrue  from  the  destruction  of 
notes  while  outstanding,  or  from  the  failure  of  holders 
to  call  for  their  redemption.  And  finally,  although 
the  expenses  of  printing  the  notes,  (but  not  of 
engraving  the  plates),  of  superintending  the  sys- 
tem, and  of  providing  for  the  safe-keeping  of  the 
bonds  deposited,  are  paid  by  the  government,  these 
charges  are  offset  by  a  tax  of  one  per  cent,  per 
annum  on  the  average  amount  of  notes  in  circula- 
tion. On  the  whole,  therefore,  whatever  may  be 
gained  by  the  banks  from  this  system,  it  cannot  be 
said  that  the  liability  of  the  government  is  onerousi 
Although  in  its  general  theory  the  national  bank- 
ing system  is  one  of  ^^  free  banking,"  under  which  the 
business  of  banking  in  all  its  branches  shall  be  open 
to  all  persons  who  comply  with  the  formalities  pro- 
vided by  the  law,  it  was  nevertheless  felt  to  be  dan- 


NATIONAL   BANKS   OF   THE    UNITED   STATES.      I4I 

gerous  to  allow  the  issue  of  an  unlimited  circulation 
so  long  as  the  currency  remained  irredeemable.  The 
attempt  to  restrict  what  was  in  theory  free  led,  there- 
fore, to  a  series  of  contradictory  and  in  some  respects 
remarkable  provisions. 

Without  restricting  the  establishment  of  banks,  the 
acts  of  1863  and  1864  limited  the  aggregate  amount 
of  notes  to  $300,000,000 ;  and  while  no  original  limi- 
bank  was  allowed  to  issue  notes  exceed-  tation  of 
ing  in  amount  its  capital  stock,  every  bank 
was  required  to  deposit  bonds  amounting  to  at  least 
one  third  of  its  capital.  Apprehending  that  the 
rapid  reorganization  of  the  numerous  State  banks 
in  the  Eastern  and  Middle  States  might  fill  up  the 
prescribed  aggregate  of  circulation,  before  the  West 
should  be  able  to  organize  a  due  proportion  of  bank- 
ing capital,  the  act  of  1863  also  required  one  half  of 
the  total  circulation  to  be  apportioned  among  the 
States  according  to  their  representative  population, 
allowing  the  other,  half  to  be  allotted  ''  having  due 
regard  to  the  existing  bank-capital  and  resources.'* 
The  reluctance  of  the  banks  to  reorganize  as  national 
banks,  however,  caused  the  omission  of  this  provision 
in  the  act  of  1864;  but  Congress  in  1865,  although 
encouraging  the  immediate  reorganization  of  exist- 
ing banks,  revived  the  provisions  for  apportioning 
the  aggregate  circulation  and  fixed  a  narrower  limit 
for  that  of  banks  of  the  larger  class. 

As  early  as  November,  1868,  notes  had  been  issued 
to  nearly  the  amount  allowed  by  law,  and  the  West 
and  South  began  to  complain  of  the  difficulty  of 
organizing   banks,   without   the    right   ot    issue,    in 


142  CHAPTERS   ON   BANKING. 

sparsely  settled  States.  In  1870  a  chance  was  of- 
fered for  the  increase  of  bank-notes  without  increase 
of  the  aggregate  paper  currency  of  the  country,  by 
the  contemplated  payment  of  certain  obligations  of 
the  Treasury  hitherto  used  by  the  banks  as  a  part 
of  their  reserves,  for  which  legal-tender  notes  would 
now  have  to  be  substituted  and  thus  withdrawn  from 
circulation.  Congress  therefore  seized  the  opportu- 
nity of  extending  the  aggregate  limit  of  notes  for 
Efforts  to  circulation,  and  authorized  $54,000,000  to 
apportion  be  apportioned  among  States  having  less 
the  issues,  ^j^^^  their  due  proportion,  and  further  re- 
quired that,  after  this  increase  of  note  circulation 
should  have  been  effected,  a  redistribution  of  the 
right  of  issue  should  be  made,  by  the  withdrawal,  to 
the  extent  of  $25,000,000,  from  States  having  more 
than  their  due  proportion,  and  by  the  apportion- 
ment of  the  same  among  States  having  less.  The 
limit  for  each  bank  thereafter  organized  was  reduced 
to  half  a  million  dollars,  and  provision  was  even 
made  for  allowing  the  removal  of  existing  banks  to 
States  having  less  than  their  due  proportion  of  note 
circulation. 

By  the  end  of  1873  the  new  limit  of  $354,000,000^', 
was  nearly  filled ;  and  finding  itself  impelled  to  legis- 
late upon  the  currency  by  the  financial  revulsion  of 
that  year.  Congress  after  painful  debate  elaborated 
the  Compromise  Act  of  June,  1874,  in  which  pro- 
vision was  made  for  the  immediate  withdrawal  of 
circulation  from  States  having  an  excess  and  its  dis- 
tribution among  banks  in  States  having  a  deficiency, 
as  fast  as  application  should  be  made  by  the  latter,  to 


NATIONAL   BANKS   OF   THE   UNITED   STATES.      I43 

the  extent  of  $55,000,000,  including  the  $25,000,000 
already  provided  for.  Arrangements  for  carrying 
this  act  into  execution,  however,  had  hardly  been 
made,  when  this  series  of  crude  and  futile  measures 
was  brought  to  an  abrupt  close,  by  the  ^j^^g^^  ^i^^ 
hasty  passage  of  the  act^  Tanuary^  1875.  Resumption 
for  the  resumption  of  specie  payments.  ^^^^^^^75- 
This  act  fortunately  swept  away  all  the  provisions 
limiting  and  apportioning  the  aggregate  amount  of 
bank-notes  to  be  authorized,  as  well  as  those  calling 
for  the  withdrawal  and  redistribution  of  issues  al- 
ready authorized,  and  thus  established  the  national 
banks  for  the  first  time  on  the  basis  of  freedom, 
required  by  the  theory  of  the  original  measure.  No 
further  change  was  needed  to  adapt  the  system  to 
specie  payments,  its  details  having  been  arranged 
at  the  outset  so  as  to  admit  of  easy  translation  into 
terms  of  specie. 

In  its  regulation  of  the  discount  and  deposit  busi- 
ness of  the  national  banks,  the  law  does  not  follow 
the  example  of  some  previous  legislation,  by  fixing  a 
limit  to  the  amount  of  securities  to  be  held  by  any 
bank,'  but  simply  prescribes  a  minimum  provisions  as  |^ 
reserve  to  be  held  for  the  protection  of  to  reserve. J 
the  liability  for  deposits.  For  banks  in  the  "re- 
serve cities,'*  named  in  the  original  act  of  Congress 
or  provided  for  by  later  legislation,^  the  reserve  must 

^  See  e.g.  Massachusetts  General  Statutes  oi  i860,  c.  57,  §  25  ;  New 
York  Revised  Statutes  of  1859,  "•>  5l8;  Maine  Revised  Statutes  of 
1857,  ch.  47,  §  19. 

^  The  reserve  cities  are  Boston,  Albany,  New  York,  Brooklyn, 
Philadelphia,  Pittsburgh,  Baltimore,  Washington,  New  Orleans, 
Louisville,  Cincinnati,  Cleveland,  Detroit,  Chicago,  Milwaukee,  St, 


144  CHAPTERS   ON   BANKING. 

be  twenty-five  per  cent,  of  the  deposits ;  for  all  other 
banks,  fifteen  per  cent.  The  provisions  for  deter- 
mining what  shall  be  counted  as  reserve  are,  how- 
ever, less  simple.  The  general  requirement  is  that 
the  reserve  shall  be  ''  lawful  money,"  or  in  other 
words  specie  or  legal-tender  notes  of  the  United 
States,  so  long  as  a  paper  legal  tender  exists.  But  | 
Clearing-House  certificates,  which  represent  lawful 
money  specially  deposited  for  the  purposes  of  the 
Clearing-House  association,  of  which  the  bank  own- 
ing them  may  be  a  member,  and  the  cash  reserve  of 
five  per  cent,  of  its  circulation,  which  every  bank  is  re- 
quired to  keep  in  the  Treasury,  are  also  to  be  counted 
as  a  parlL-of  the  reserye  against  deposits.  And  it  is 
further  provided  that,  for  any  bank  in  a  reserve 
city  one  half  of  its  reserve  may  consist  of  cash 
deposits  in  the  city  of  New  York,  or  in  any  other 
"  central  reserve  city,"  *  and  for  any  bank  outside  of 
the  reserve  cities  three  fifths  of  its  reserve  may  in 
like  manner  consist  of  deposits  with  banks  in  those 
cities. 

The  permission  thus  given,  to  count  as  cash  these 
deposits,  which  are,  in  fact,  only  demands  for  cash, 
has  a  marked  effect  upon  the  composition  of  the 

Paul,  Minneapolis,  St.  Louis,  Kansas  City,  St.  Joseph,  Omaha,  and 
San  Francisco.  The  list  included  Leavenworth,  until  the  passage  of 
the  act  of  March  i,  1872.  Any  city  having  50,000  inhabitants  can 
now  be  made  a  reserve  city,  upon  application  made  by  three  fourths 
of  the  national  banks  established  in  it.     24  Statutes  at  Large ^  559. 

^  By  an  act  of  1887,  a  city  having  200,000  inhabitants  can  be  made 
a  central  reserve  city,  upon  application  made  by  three  fourths  of  the 
national  banks  established  in  it.  24  Statutes  at  Large,  559.  In 
December,  1890,  the  central  reserve  cities  were  New  York,  Chicago, 
and  St.  Louis. 


NATIONAL   BANKS    OF   THE   UNITED    STATES.      I45 

reserve  held  by  the  banks  as  an  aggregate,  and  there- 
fore upon  the  strength  of  the  whole  mass  of  banks 
at  any  given  moment.  If  we  take  the  returns  of  the 
national  banks  for  October  2,  1890,  we  find  their 
deposits  amounting  in  the  aggregate  to  1,758.7  mil- 
lions of  dollars,  requiring  a  reserve  of  353.7  millions. 
They  are  returned  as  holding  478.2  millions  of 
reserve  in  all,  and  were,  therefore,  on  the  average, 
far  above  the  legal  minimum.  But  this  great  ap- 
parent reserve  was  composed  as  follows : 


Specie  .... 
Other  lawful  money 
Redemption  fund  . 
Due  from  agents    . 


Total 


$195.9  millions. 
86.8        " 
6.1 
189.5        " 


$478.2  + 


Of  actual  cash,  then,  the  banks  of  the  country  at 
this  date  held  but  282.7  miUions,  much  less  than  the 
amount  of  reserve  required  for  their  liabilities, — the 
remaining  sum,  which  apparently  made  their  con- 
dition remarkably  strong,  consisting  chiefly  of  debts 
due  from  one  bank  to  another.  The  ability  of  the 
mass  of  banks,  therefore,  to  meet  the  pressure  of  a 
financial  crisis  was  dependent  on  the  ability  of  the 
debtor  banks,  to  pay  upon  demand  the^^^^^^^^^^ 
sums  deposited  with  them  and  relied  upon  of  risks  at 
by  the  others  as  a  part  of  their  reserve,  or  New  York, 
in  other  words,  on  the  ability  of  the  banks  of  New 
York  City  to  meet  their  demand  liabilities.  The 
reserve  of  those  banks,  however,  on  which  all  the 
others  rested,  was  but  little  above  the  legal  mini- 
mum at  the  date  named,  and  sometimes  under 
10 


146  CHAPTERS    ON   BANKING. 

similar  conditions  has  been  below  that  point,  so  that 
with  an  apparently  high  reserve  for  the  country  at 
large,  there  was  such  weakness  at  the  central  and 
most  exposed  point  as  to  impair  seriously  the  value 
of  this  precaution.* 

The  relation  of  the  New  York  banks  to  the  other 
banks  of  the  country,  as  the  depository  of  their 
reserves,^  is  plainly  quite  analogous  to  that  of  the 
Bank  of  England  as  the  depository  of  the  joint-stock 
and  private  banks  of  London,  and  the  effects  seen 
in  the  weakening  of  reserves  and  the  concentration 
of  risks  are  the  same  in  both  cases.'  As  regards  the 
national  banks,  the  tendency  to  centralize  the  re- 
serves, favored  by  the  law,  is  heightened  by  the 
practice,  long  established  among  the  New  York 
banks  and  also  existing  elsewhere,  of   inviting  de- 

*  The  reserve  October  2,  i8go,  was  divided  between  city  and  coun- 
try, and  classified  as  follows,  in  millions  : 

Classification  of  Reserve, 
Reserve      Reserve  Le^al  Ten-     S/VrV    Due  frotn 

required.       held.      Specie,     der^  etc.         fund.         agents. 

New  York  City     $83.2       $92.5     $78.4    $13.9  $.2       $    — 

Other  Res.  cities    141. 6       160.2       63.2       35.2  .7  61. 

Country      .     .       128.9       225.5        54-3       37-7  5-2         128.5 


Totals    .     .     $353.7    $478.2    $195.9    $86.8  $6.1       $189.5 

The  published  reports  make  it  probable,  although  not  certain,  that 
in  the  middle  of  October,  1873,  when  the  reserves  of  the  New  York 
banks  had  fallen  to  less  than  eleven  per  cent,  of  their  liabilities,  and 
payments  had  been  generally  suspended,  the  reserves  of  the  rest  of  the 
country  were  above  the  line  required  by  law. 

'^  The  central  position  of  New  York  is  jiot  seriously  affected  by  the 
conversion  of  Chicago  and  St.  Louis  into  central  reserve  cities,  under 
the  act  of  1887. 

2  See  Bagehot's  Lombard  Street^  pp.  160-173  ;  Dun's  British 
Banking  SiaiisUcs,  p.  129. 


NATIONAL   BANKS   OF   THE   UNITED   STATES.      I47 

posits  from  country  banks  by  the  payment  of  interest.* 
The  opportunity  of  converting  a  barren  reserve  into 
an  interest-bearing  resource,  and  yet  counting  it  as 
reserve,  has  always  been  attractive,  and  has  caused 
an  habitual  transfer  from  the  country  banks  to  those 
of  New  York,  sometimes  estimated  at  not  far  from 
$80,000,000.  The  employment  given  to  the  funds 
thus  held  subject  to  call  is  a  topic  of  serious  interest 
on  which  it  is  impossible  to  enter  now. 

For  the  enforcement  of  the  provisions  as  to  reserve, 
the  law  provides  that  whenever  the  reserve  of  any 
bank  falls  below  the  prescribed  limit,  the  Enforcement 
bank  shall  neither  "  increase  its  liabilities  of  provisions 
by  making  any  new  loans  or  discounts," 
otherwise  than  by  the  purchase  of  sight  bills  of 
exchange,  nor  shall  it  make  any  dividend,  until  the  re- 
serve has  been  restored  to  its  due  proportion.  The 
Comptroller  of  the  Currency  is  also  authorized  to  no- 
tify any  bank  whose  reserve  is  insufficient  that  it  must 
be  made  good,  and  in  case  of  failure  to  comply  with- 
in thirty  days,  he  may,  with  the  concurrence  of  the 
Secretary  of  the  Treasury,  appoint  a  receiver  to  wind 
up  the  business  of  the  bank.  Although  the  ample 
discretion  thus  given  to  the  Comptroller  has  been 
used  with  moderation,*  the  prohibition  of  further 

^  This  practice  was  condemned  by  resolution  by  the  banks  of  the 
New  York  Clearing  House  in  1857,  1873,  and  18S4.  See  Bankers 
Magazine y  April,  1858,  p.  822  ;  Commercial  and  Financial  Chronicle^ 
November,  1873,  p.  651  ;    Banker's  Magazine,  August,  1884,  p.  129. 

Resolutions  alone,  however,  have  never  proved  to  be  a  cure. 

2  See  the  course  pursued  in  September  and  October,  1873,  when  the 
reserve  of  the  banks  of  New  York  were  far  below  the  line»  and  both 
city  and  country  banks  had  suspen<led  payment. 


148  CHAPTERS   ON   BANKING. 

discounts,  when  the  reserve  falls  below  a  given  point, 
makes  a  hard  and  fast  line,  the  approach  to  which 
never  fails  to  cause  uneasiness,  and  in  some  condi- 
etions  of  affairs  is  viewed  with  great  alarm.  In  any 
actual  crisis,  the  declaration  that,  in  a  given  contin- 
gency like  this,  the  usual  accommodation  of  the 
public  must  stop  and  liquidation  must  begin,  is  the 
surest  means  of  increasing  the  pressure  for  loans  and 
of  thus  converting  a  crisis  into  a  panic.  For  ease  in 
operation  and  greater  safety,  some  more  elastic  pro- 
vision is  needed,  which  shall  insure  a  sufficiently  high 
average  of  reserve  and  yet  threaten  no  harsh  break 
in  operations  at  a  given  point.  The  Bank  of  Eng- 
land has  in  its  hands  a  superior  instrument  for  this 
purpose  in  a  sliding  scale  of  discount,  by  which  it  can 
encourage  or  discourage  borrowers  and  thus  deplete 
or  replenish  its  reserve,  without  ceasing  its  operations 
altogether  at  any  point  yet  reached.  This  expedient, 
however,  is  less  applicable  in  the  United  States, 
partly  because  of  a  traditional  prejudice  against  the 
adjustment  of  rates  of  discount  by  the  demand  in 
the  market,  widely  prevalent  among  our  people,  and 
partly  because  Congress  has  been  obliged  by  probable 
lack  of  authority  to  forego  the  establishment  of  a 
general  law  respecting  interest,  and  to  recognize,  ia 
every  State  the  rates  there  prescribed  by  the  local 
legislature.  A  suggestion  of  an  elastic  limit  is  con- 
tained in  certain  provisions  of  the  German  bank  law, 
which,  beyond  a  prescribed  line,  tax  all  operations, 
without    prohibiting    them ;  *    but    this   expedient, 

*  See  below,  chapter  xi.     Also  Jevons,  Money  afid  the  Mechanism 
of -Exchange,  p.  226. 


NATIONAL   BANKS   OF   THE   UNITED   STATES.      1 49 

devised  long  after  the  establishment  of  the  national 
banking  system  by  Congress,  has  not  yet  had  such 
trial  as  to  test  its  capabilities  thoroughly. 

Much  controversy  has  been  excited  by  the  ques- 
tion as  to  the  rate  of  profits  which  the  national  banks 
have  obtained  from  their  rip^ht  of  issuing^ 

11  1  .         i-    1  1  T     Supposed  ex- 

notes  secured  by  a  deposit  of  bonds.     It     traordmary 

follows  from  what  has  been  shown  in  the    P^°^^f  ^f°™ 

circulation, 

preceding  chapters,  that  their  case  is  in  no 
respect  different  as  regards  profits  from  that  of  banks 
which  use  their  credit  in  the  form  of  deposits,  in 
order  to  make  investments  in  interest-bearing  secu- 
rities. The  notion  often  entertained,  that  the 
national  banks  have  some  peculiar  opportunity  of 
making  a  double  profit,  "  by  receiving  both  interest 
earned  by  their  bonds,  and  interest  earned  by  the 
loan  of  the  notes  issued  upon  the  bonds,"  overlooks 
the  fact  that  every  bank  uses,  as  its  means  for  ob- 
taining securities,  its  capital  and  whatever  credit  it 
can  employ  in  addition.^  Every  bank,  then,  as  a 
consequence  of  its  use  of  its  credit  in  any  form,  must 
receive  interest  earned  by  the  investment  of  its  capi- 
tal and  also  interest  earned  by  what  we  may  call  the 
investment  of  its  credit ;  and  the  fact  that  the 
national    banks,  like    others,   have   the  opportunity 

*  As  a  great  number  of  state  banks  of  issue  were  converted  into 
national  banks,  a  comparison  of  the  accounts  of  any  such  bank,  before 
its  conversion  and  after,  is  easily  made,  and  will  show  that  the  deposit 
of  a  part  of  its  property  at  Washington  gave  it  no  source  of  profit 
which  it  did  not  enjoy  before.  The  actual  profit  earned  by  the  banks 
from  their  right  of  circulation  was  estimated  by  the  Comptroller  of  the 
Currency  in  1883  not  to  exceed  $46  on  $90,000  of  notes.  See  Comp' 
trolley's  Report,  1883,  p.  13. 


150  CHAPTERS   ON   BANKING. 

for  making  credit  as  well  as  capital  yield  a  profit, 
neither  springs  from  the  system  on  which  their  notes 
are  secured,  nor  depends  upon  it.  Indeed,  it  must 
be  manifest  that  their  deposits  yield  them  a  profit  in 
precisely  the  same  way  as  their  notes,  and  usually 
much  greater  in  amount.  The  conclusive  practical 
answer  to  the  idea  of  a  supposed  extraordinary  profit 
is  to  be  found,  however,  in  the  conduct  of  the  banks 
not  to  be  themsclvcs,  especially  since  the  passage  of 
reconciled  the  act  of  1 8/4,  already  referred  to.  That 
with  facts.  ^^^^  recognizing  the  desire  of  many  banks 
to  reduce  their  circulation  and  secure  possession  of 
their  bonds,  provided  that  any  bank  might  deposit 
**  lawful  money  "  with  the  Treasurer  of  the  United 
States  to  enable  him  to  redeem  its  notes,  and  there- 
upon withdraw/r^  tanto  the  bonds  deposited,  provided 
the  amount  of  its  bonds  left  in  deposit  were  not 
reduced  below  $50,000.^  Several  important  national 
banks  had  never  chosen  to  issue  notes,  although  re- 
quired by  the  law  to  maintain  a  deposit  of  bonds; 
under  this  provision  a  considerable  number  of  others 
reduced  their  notes  to  the  $45,000  which  the  required 
minimum  deposit  of  bonds  would  support.^  The 
withdrawals  of  notes  continued  for  several  years, 
and  although  new  banks  were  formed  and  the  note 
circulation    increased    in    some    sections,   under  the 

^  For  an  objection  made  at  the  Treasury  -to  the  working  of  this 
provision,  s^q  Finance  Report,  1880,  p.331  \  1881,  p.  221.  For  the  con-- 
nection  between  this  provision  and  the  "bank  panic"  of  March, 
1 88 1,  see  Comptroller  s  Report  for  188 1,  p.  39  ;  Atlatitic  Monthly^ 
February,  1882,  p.  195. 

"^  See  in  Comptroller' s  Report,  1889,  p,  33,  a  list  of  national  banks 
without  circulation. 


NATIONAL. BANKS    OF   THE    UNITED    STATES.      151 

authority  for  free  banking  given  by  the  Resumption 
Act,  the  total  banking  capital  and  note  circulation 
alike  declined,  until  the  summer  of  1878.  Both  in- 
creased after  the  resumption  of  specie  payments,  but 
the  circulation  of  bank-notes,  although  open  to  all 
banks,  and  to  any  amount,  never  reached  its  old 
point.  This  course  of  things  was  entirely  inconsist- 
ent with  the  existence  of  large  profits,  arising  from 
the  issue  of  notes  in  the  method  prescribed  by  the 
national  system.  It  is  impossible  to  believe  that,  if 
such  profits  were  reaped,  existing  banks  would  have 
neglected  or  renounced  the  opportunity  of  making 
them,  or  that  the  multitude  of  private  bankers  and 
of  State  banks  would  have  failed  to  seize  upon  an 
opportunity  which  was  free  to  all,*  by  organizing 
under  the  national  system. 

That  a  good  rate  of  profit  has  been  made  by  the 
national  banks  upon  their  general  business  is  no 
doubt  true.     Especially  during:  the  period 

r    .  1  11  1        r    r,  •         ^he  busincss 

of  irredeemable  paper  and  of  fiuctuatmg  in  general 
credit,  their  harvest  was  large.     The  law     ^^^^^^^jiy 

'  *=>  profitable. 

has  from  the  first  required  of  every  bank 
that  a  part  of  its  profits  should  be  reserved,  until  a 
surplus  amounting  to  one  fifth  of  the  capital  should 
be  accumulated.  A  solid  foundation  was  laid  for 
this  surplus  in  many  cases,  by  the  sale  at  a  high 
premium  of  the  gold  held  by  State  banks  before 
their  reorganization,  and  retained  by  them  until  the 
adoption  of  the  paper  system  had  plainly  become 

^  Until,  the  spring  of  1881,  two  thirds  of  the  bonds  held  by  the 
banks  to  secure  their  circulation  bore  interest  at  not  less  than  five 
per  cent,  and  a  considerable  amount  at  six  per  cent. 


152  CHAPTERS   ON    BANKING. 

definitive.  The  banks  had  thus  on  the  average 
accumulated  the  surplus  required  by  law  before  the 
end  of  1869,  since  which  time  their  accumulation  has 
increased  or  diminished,  as  the  times  were  prosper- 
ous or  the  reverse,  the  aggregate  surplus  varying 
from  26.6  per  cent,  of  the  capital  in  October,  1875,  to 
25  per  cent,  in  December,  1878,  and  again  to  nearly 
33  per  cent,  in  October,  1890.*  The  annual  dividends 
paid  from  earnings  after  the  reservation  for  surplus, 
also  stood  at  their  highest  point  during  the  period 
of  most  rapid  accumulation,  and  have  varied  from  a 
maximum  of  10.58  per  cent,  of  the  capital  to  a  mini- 
mum of  7.59  per  cent.  Without  doubt  this  rate  of 
dividends  shows  a  prosperous  business,  but  how  far 
the  prosperity  is  due  to  privileges  enjoyed  under  the 
national  system,  may  be  judged  from  the  approach 
which  State  banks  have  made  to  national  banks  in 
their  earning  capacity.* 

The  highest  point  reached  by  the  circulation  of  the 
national  banks  after  the  resumption  of  specie  pay- 
ments was  at  the  end  of  1881,  when  it  stood  above 
$325,000,000.     From  that  point,  however,  its  decline 

^  For  many  years  the  largest  surplus  held  has  belonged  to  a  bank 
which  issues  no  notes,  but  has  accumulated  many  times  the  amount 
of  its  capital.  It  is  true  in  general  that  the  banks  of  largest  surplus 
have  not  owed  it  to  their  issue  of  notes. 

2  In  New  York,  where  there  are  about  150  banks  organized  under 
the  laws  of  the  State,  the  percentage  of  surplus  and  undivided  profits 
to  capital  under  the  two  systems  respectively  was  in  September,  1879, 

1882,  1884,  and  1889  as  follows  : 

National  banks.  State  hanks, 

September,  1879      ...         .45      ...         .37 

1882   ...    .    .58   .    .    .   '.SI 

1884  ...    .57   ...    .53 

1889  ...    .86   ...    .68 

See  Reports  of  State  Banking  Depai'tmcnl  and  ConiptrolL-r  s  R:port, 


NATIONAL   BANKS   OF   THE    UNITED    STATES.      1 53 

has  been  rapid,  with  hardly  a  break  in  the  continuous 
fall,  until  at  the  close  of  1890  it  stood  below  $123,- 
000,000.     The  proximate  cause  of  this  re- 

1      ,  .         , .  r       1      .  •     •         Continuous 

markable  disappearance  of  what  was  origi-       decline  of  I 
nally  the  leading  feature  of  the  system,  is  of       *^®  ^^"^  J 

.  r     1  •  t       circulation.    • 

course  the  steady  payment  of  the  national 
debt  and  rise  of  the  national  credit,  and  the  natural 
disinclination  oT  bafrks"  to  hotdT^n  any  considerable 
scale,  investments  which  are  no  longer  to  be  relied 
upon  to  yield  the  holder  so  much  as  2^  per  cent. 
But  behind  this  unexpected  failure  of  the  basis  on 
which  the  secured  circulation  rests,  is  the  more 
serious  difficulty  presented,  by  the  indisposition  to 
seek  for  any  new  method  of  securing  the  notes. 
Few  schemes  thus  far  proposed  have  gone  beyond 
the  point  of  allowing  the  issue  of  notes  to  the  par 
value  of  the  bonds  deposited,  and  of  substituting 
for  the  bonds  now  outstanding  a  fresh  issue,  bearing 
a  rate  of  interest  low  enough  to  avoid  the  rise  of 
any  considerable  premium.  No  such  measure,  how-  ^ 
ever,  can  afford  any  permanent  remedy.  A  paper  • 
currency,  therefore,  which  has  given  unqualified  sat- 
isfaction and  which  forms  a  natural  part  of  a  banking 
system  otherwise  enjoying  unexampled  prosperity 
and  rendering  valuable  service  to  the  community, 
bids  fair  to  become  extinct,  without  any  real  effbrt 
to  prolong  its  existence.  This  singular  result  is  ap- 
parently due,  in  part,  to  the  continued  force  of  some 
popular  prejudices  against  any  issue  of  notes  by  Cor- 
porations and  in  favor  of  direct  issues  of  paper  by 
the  government,  and  in  part  to  the  competition  of 
other  schemes  of  currency,  strengthened  by  the  long 
controversy  as  to  the  silver  coinage. 


CHAPTER  X. 

THE   BANK   OF   ENGLAND. 

The  national  banks  of  the  United  States,  it  has 
been  seen,  rest  upon  the  simple  principle  of  securing 
the  solvency  of  bank-notes  by  a  pledge  of  salable 
property.  The  Bank  of  England,  although  originally 
a  bank  of  the  simplest  type,  like  the  Bank  of  France, 
issues  notes  which,  since  the  adoption  of  the  act  of 
1844,  are  secured  by  a  mixture  of  securities  and. 
"Modified  t  e  ^P^^ic,  upon  a  systcm  which  presents  an 
of  secured  interesting  and  important  variation  upon 
that  detailed  in  the  last  chapter.  Dis- 
regarding its  chronological  relation,  therefore,  to  the 
cases  already  discussed,  we  take  it  up  as  coming  in/ 
the  third  place  in  a  natural  order  of  classification. 

The  Bank  of  England  owes  its  origin  to  the  finan- 
cial straits  to  which  the  government  of  William  and 
ori  -n  f  th  ■'^^^y  fouled  itsclf  rcduccd  in  carrying  on 
Bank  of  the  war  with  Louis  the  Fourteenth.  The 
England.  revcnucs  of  the  kingdom  were  small,  the 
public  credit  weak,  and  the  very  title  of  the  dynasty 
unsettled.  The  growing  wealth  and  business  of  the 
country  had  caused  private  banking  houses  to  spring 
up.  The  paper  given  by  these  houses  to  their  credi- 
tors had  acquired  a  circulation,  limited  indeed,  but^ 

154 


THE    BANK    OF    ENGLAND.  155 

sufficient  to  show  its  convenience,  and  projects  for 
the  establishment  of  a  public  institution  on  the  scale, 
if  not  on  the  model,  of  the  great  continental  banks, 
had  been  discussed  for  many  years/  Under  these 
circumstances,  as  an  expedient  for  raising  a  million 
sterling,  for  which  no  other  resource  could  be  found, 
the  government  in  1694  adopted  the  scheme  pro- 
posed by  William  Paterson,  a  Scotch  adventurer, 
and  proposed  to  Parliament  that  a  loan  should  be 
offered  for  public  subscription  and  made  attractive 
by  a  grant  of  incorporation,  with  banking  privileges 
to  be  enjoyed  by  the  subscribers  and  their  succes- 
sors. The  measure  seems  to  have  been  contested 
chiefly,  although  not' wholly,  on  party  grounds,  and 
was  passed  after  a  severe  struggle,  and  thus  the^ 
Bank  of  England  came  into  existence  as  a  Whig 
corporation.^ 

The  act  of  1694  provided  for  a  loan  to  the  govern- 
ment of  ;^ 1, 200,000,  bearing  interest  at   eight  per 

^  McLeod,  Theory  and  Practice  of  Bankings  i.,  p.  210,  prints  a 
"goldsmith's  note"  which  is  still  preserved,  dated  1684,  And  see 
Macaulays  History,  vii.,  p.  134.  A  curious  pamphlet  of  1676  (?) 
on  the  introduction  of  private  banking  in  London  is  reprinted  in  the 
Quarterly  Journal  of  Econojnics,  January,  1888.  And  see  Ibid.,  July, 
1888,  p.  482,  for  notes  of  schemes  for  a  national  bank,  broached  at 
various  dates  in  the  seventeenth  century. 

^  The  fiscal  character  of  the  measure  is  well  shown  by  its  title : 
*'  An  Act  for  granting  to  their  Majesties  several  Rates  and  Duties  upon 
Tunnage  of  Ships  and  Vessels,  and  upon  Beer,  Ale,  and  other  Liquors, 
for  securing  certain  Recompenses  and  Advantages  in  the  said  Act 
mentioned,  to  such  Persons  as  shall  voluntarily  advance  the  sum  of 
fifteen  hundred  thousand  Pounds  towards  carrying  on  the  War  against 
France,''  5   William  and  Mary,  ch.  20. 

For  the  political  relations  of  the  Bank  of  England,  at  and  after  its 
establishment,  see  Macaulays  History,  vii.,  p.  147, 


156  CHAPTERS   ON    BANKING. 

cent.,  and  incorporated  the  subscribers,  with  this 
amount  of  nominal  capital,  as  the  Governor  and  Com- 
pany of  the  Bank  of  England, — a  title  which  has 
never  been  changed.  The  corporation  was  empow- 
ered to  deal  in  coin,  bullion,  and  exchange,  and  to 
lend  upon  security,  but  was  forbidden  to  deal  in 
merchandise  in  any  form.  It  could  not  borrow  nor 
give  security  by  bill,  bond,  or  agreement,  for  an 
amount  exceeding  its  capital;  no  provision  was 
m^de  for  the  transfer  of  its  bills,  "  obligatory  or  of 
credit,"  except  by  indorsement ;  nor  was  any  mo- 
nopoly created  in  its  favor.  In  this  form  the  char- 
ter of  the  Bank  gave  little  promise  of  its  future 
importance.  Three  years  later,  however,  the  neces- 
sities of  the  government  and  the  embarrassments  of 
the  Bank,  which  had  been  obliged  to  suspend  pay- 
ment in  1696,  led  to  a  revision  of  the  charter,  in 
which  the  outlines  of  the  great  structure  begin  to 
appear.^  The  issue  of  notes  payable  to  bearer  on 
demand  was  authorized,  thus  laying  the  foundation 
for    a    true    bank-note     circulation,''    the 

Monopoly  ^  ' 

established  monopoly  of  Corporate  organization  was 
in  1697.  granted    by   providing    that,    during   the 

continuance  of  the  charter,  no  other  bank  or  corpora- 
tion in  the  nature  of  a  bank  should  be  allowed  in 
the  kingdom;  and,  on  the  other  hand,  the  capital 
was  doubled  by  a  fresh  advance    from    the    stock- 

^  8  and  9  William  III. ,  ch.  20. 

-  The  notes  issued  under  the  act  of  1694  appear  to  have  borne 
interest,  and  being  made  to  order,  could  have  had  but  a  limited 
circulation.  No  notes  of  less  than  ;£'20  were  issued  until  in  1759  tbe 
Bank  began  the  issue  of  notes  for  ;!^  15  and  ;£"io.  Anderson's  Origin 
of  Commerce,  ii.,  p.  413. 


THE    BANK    OF   ENGLAND.  1 57 

holders  to  the  government,  and  the  interest  payable 
by  the  latter  was  reduced  to  six  per  cent. 

From  this  point  the  growth  of  the  Bank  and  the 
increase  of  its  influence  were  rapid.  The  corporation 
became  the  chief  depository  of  the  public  money, 
and  the  agent  of  the  Treasury  in  many  financial 
operations.  In  1720  it  carried  on  a  mad  struggle 
with  the  South  Sea  Company  for  the  control  of  the 
business  of  refunding  the  national  debt,  and  man- 
aged, although  with  difficulty,  to  save  its  own  credit 
in  the  crisis  which  destroyed  its  rival.  Further  loans 
to  the  government  and  additions  to  the  capital  of 
the  Bank  were  made  in  quick  succession.  In  1722 
its  capital  stood  at  nearly  nine  millions,  and  it  was 
also  able  to  establish  from  its  profits  the  surplus 
fund  now  called  "  the  Rest,"  and  thus  to  save  its 
dividends  from  great  fluctuation.  In  1782  the  capital 
had  risen  to  more  than  eleven  millions  and  a  half, 
and  in  18 16  it  had  risen  to  ^14,553,000,  at  which 
figure  it  has  stood  ever  since.  Of  the  loans  to  the 
government,  which  had  risen  in  nearly  the  same 
proportion  as  the  capital,  ojie  fourth  was  repaid  in 
1834,  reducing  the  total  to  ;^i  1,015,100,  which  is  its 
"present  amount.  By  the  year  1750  the  government 
had  succeeded  in  reducing  the  interest  on  most  of 
its  debt  to  the  Bank  to  three  per  cent.,  and  it  has 
since  used  the  opportunity  afforded  by  the  periodical 
necessity  for  a  renewal  of  the  charter,  to  lessen  still 
more  the  burden  of  its  interest,  by  requiring  from 
the  Bank  an  annual  bonus  and  other  pecuniary  con- 
cessions, in  consideration  of  the  extension  of  its 
monopoly. 


158  CHAPTERS    ON    BANKING. 

This  monopoly,  dating,  as  has  just  been  said,  from 
the  act  of  1697,  and  confirmed  by  the  act  of  1707, 
was  further  defined  by  the  act  of  1742  ^  as  the  right 
of  "  exclusive  banking,"  the  true  intent  being,  as  is 
declared  in  the  latter  year,  that  "  no  other  Bank  shall 
be  erected,  established  or  allowed  by  Parliament, 
and  that  it  shall  not  be  lawful  for  any  Body  Politick 
or  Corporate  whatsoever,  erected  or  to  be  erected,  or 
for  any  other  Persons  whatsoever,  united  or  to  be 
united,  in  Covenants  or  Partnership,  exceeding  the 
number  of  six  Persons,  in  that  Part  of  Great  Britain 
called  England^  to  borrow,  owe,  or  take  up,  any  Sum 
or  Sums  of  Money  on  their  Bills  or  Notes,  payable 
at  Demand,  or  at  any  less  Time  than  six  Months 
from  the  borrowing  thereof,  during  the  Continuance 
of  such  said  Privilege  to  the  said  Governor  and 
Company."  It  is  clear  from  this  language  that  Par- 
liament understood  by  "  banking  "  only 
of^thT^o-  the  issue  of  notes,  and  that  the  exclusive 
nopoiy  of  ^^  privilege  of  the  Bank  did  not  prevent  the 
issue  of  such  notes  by  partnerships  having 
only  six  partners  or  less,  nor  the  performance  of  the 
other  banking  functions  by  companies  or  partner- 
ships of  a  greater  number  of  partners.  Notes  con- 
tinued to  be  issued  by  the  London  private  banking 
houses,  some  of  which  were  of  longer  standing 
than  the^  Bank  of  England  itself,  and  by  country 
bankers,  of  whom  the  number  increased  rapidly 
in  the  second  half  of  the  eighteenth  century. 
The  London  bankers,  it  is  true,  began  not  far 
from    the   year    1772    to    discontinue   the   issue   of 

^  6  Anne,  ch.  22  ;   15  George  II.,  ch.  13. 


THE    BANK   OF   ENGLAND.  1 59 

notes/  finding  the  check  system  identical  in  its  ad- 
vantages and  more  convenient  in  practice;  but  their 
right  of  issue  was  merely  in  abeyance,  until  it  was 
formally  taken  away  in  1844.  The  country  bankers, 
however,  with  many  vicissitudes  of  fortune,  have 
continued  the  issue  of  notes  to  this  day,  subject  to 
the  restrictions  contained  in  the  Bank  Charter  Act 
of  1844,  presently  to  be  described. 

That  the  Bank  monopoly  in  its  strict  interpretation 
also  permitted  the  exercise  of  all  banking  functions, 
except  issue,  by  joint-stock  banks  and  companies  of 
more  than  six  persons,  had  indeed  been  noticed,  but 
seems  to  have  been  little  considered,  until  the  dis- 
cussions of  1826,  which  were  renewed  upon  the 
revision  of  the  charter  in  1833.  The  growing  de- 
mands of  the  country  for  banking  facilities,  and  the 
slowness  with  which  the  Bank  of  England  responded 
to  these  demands  by  the  establishment  of  branches, 
caused  much  unsound  banking  by  private  firms, 
while  a  lingering  doubt  as  to  the  meaning  of  the 
monopoly  prevented  the  foundation  of  joint-stock 
banks  with  large  capital.  Lord  Liverpool  is  reported 
as  declaring  in  1826,  that  the  effect  of  the  law  ''  is  to 
permit  every  description  of  banking,  except  that 
which  is  solid  and  secure."  The  result  joint-stock;^ 
of  this  state  of  things  was  that,  notwith- banking  made 
standing  the  resistance  of  the  Bank  of  ^ga ,  1 2  . 
England,  an  act  was  passed  in  1826,  giving  to  com- 
panies of  more  than  six  persons  the  right  of  issuing 

*  McLeod's  Dictiona7'y  of  Political  Etonomy,  p.  88.  In  his  Theory 
and  Practice  of  Baiiki^ig,  i.,  p.  211,  Mr.  McLeod  says  that  the  latest 
London  banker's  note  preserved  is  dated  1793. 


l6o  CHAPTERS    ON    BANKING. 

notes,  when  established  at  a  greater  distance  than 
sixty-five  miles  from  London,  thus  creating  an  im- 
portant exception  to  the  monopoly  hitherto  enjoyed 
by  the  Bank.  The  act  of  1833,  ^^^  renewing  the 
charter,  also  expressly  declared  that  companies  and 
partnerships,  although  composed  of  more  than  six 
persons,  might  carry  on  the  business  of  banking  in 
London,  or  within  the  radius  of  sixty-five  miles, 
provided  they  should  issue  no  circulating  notes.* 

This  legislation  was  followed  by  a  great  extension 
of  joint-stock  banking.  The  London  and  West- 
minster Joint-Stock  Bank,  now  one  of  the  largest 
banks  of  deposit  in  existence,  was  established  the 
next  year,*  and  many  banks  of  issue  began  business 
outside  of  the  geographical  limit.  The  extension, 
however,  was  too  rapid  to.be  sound;  the  disturbed 
condition  of  business  affairs  for  a  large  part  of  the 
next  decade  stimulated  agitation  ;  and  public  opin- 
ion was  disposed  to  find  in  a  vicious  note  circulation 
the  cause  of  the  repeated  commercial  crises.  The 
necessity  for  a  renewal  of  the  charter  of  the  Bank  of 
England  in  1844  gave  to  the  government  of  Sir 
The  Bank  Robcrt  Pccl  an  opportunity,  both  for  re- 
charterAct  vising  the  Organization  of  the  Bank,  and 
^  ^^'  for  putting  an  end  to  the  increase  of  the 

issues  of  the  joint-stock  banks,  and  the  result  was 
the  passage   of  the   measure   known  as  the  *^  Bank 

'  7  George  IV.,  ch.  46  ;  3  and  4  William  IV.,  ch.  98. 

^  The  London  and  Westminster  was  for  many  years  under  the 
management  of  James  W.  Gilbart,  author  of  several  works  on  bank- 
ing, and  owes  its  existence  largely  to  his  sagacity.  For  a  short 
account  of  its  early  struggles,  see  Gilbart,  Principles  and  Practice  of 
Banking,  p.  462. 


THE    BANK   OF   ENGLAND.  l6l 

Charter  Act  of  1844,"  or  ''  Peel's  Act,"  in  which  are 
embodied  the  leading  provisions  by  which  the  bank- 
note circulation  of  England  and  Wales  is .  now 
regulated.^  By  this  act,  Parliament  undertook  to 
make  the  notes  of  the  Bank  of  England  secure,  and 
to  limit  the  issue  of  bank-notes  of  all  other  kinds  in 
England  and  Wales. 

To  accomplish  the  first  of  these  objects  the  act 
provided  for  the  division  of  the  Bank  into  two  de- 
partments, the  Issue  Department  and  the  ^. 
Banking  Department.  The  former  was  of  issue 
charged  exclusively  with  the  issue  and  re-  ^"  ^"  ^"^* 
demption  of  notes ;  the  latter  was  charged  with  the 
other  functions  of  banking,  including  the  ordinary 
business  of  discount  and  deposit  ;  and  in  all  dealings 
with  each  other  the  two  departments  were  made  as 
independent  as  if  they  belonged  to  distinct  corpora- 
tions. [  For  all  notes  issued  by  it  the  Issue  Depart- 
ment was  required  to  hold  either  government 
securities,  or  coin  or  bullion  J  and  the  amount  of 
I  securities  which  it  could  hold  being  limited  by  the 
original  provision  to  ^14,000,000,  it  followed  that 
for  all  notes  outstanding  in  excess  of  that  amount  it 
must  have  an  equivalent  in  the  precious  metals.^    As 

^  7  and  8  Victoria,  ch.  32.  For  abstracts  of  this  important  act,  see 
McCulloch,  Commercial  Dictioitary  {ediiiion  of  1856),  p.  84;  Gilbart, 
Principles  and  Practice  of  Banking,  p.  428  ;  Fenn,  Compendium  of 
the  Funds  (ed.  1883),  p.  77. 

^  The  act  provides  that  of  the  coin  and  bullion  held  by  the  Issue 
Department  one  fifth  may  be  silver.  For  the  reason  for  this  provision 
see  Hansard's  Debates,  May,  20,  1844,  p.  1334.  The  Bank  ceased 
to  hold  silver  for  this  purpose  in  September,  1853.  The  conditions 
on  which  silver  might  again  be  held  were  stated  by  the  Bank  in  1881. 
Conference  Mon^taire  Internationale,  ii.,  p.  139. 
II 


1 62  CHAPTERS    ON    BANKING. 

experience  had  shown  that  the  ordinary  uses  of  the 
country  never  failed  to  require  an  amount  of  notes 
higher  than  ;^  14,000,000,  this  provision  insured  the 
presence  of  coin  or  bulHon  for  the  redemption  of  all 
notes  whose  presentation  for  payment  could  be 
deemed  morally  possible,  and  made  it  unnecessary  to 
fix  any  limit  to  the  issue.  The  ordinary  business  of 
the  Issue  Department  was  then  reduced  to  the  auto- 
matic function  of  giving  out  notes  for  coin,  or  coin 
for  notes,*  to  whatever  extent  and  from  whatever 
quarter  such  exchange  might  be  required. 

Under  this  arrangement  the  Banking  Department 
carries  on  its  business  of  buying  securities  and  using 
its  credit  in  the  form  of  deposit  accounts,  on  the 
same  general  principles  on  which  any  bank  of  de- 
posit and  discount  is  conducted.  It  is  bound  to 
^^jQt^et  all  its  demand  liabilities  in  cash,  and  for  this 
purpose  it  habitually  maintains  a  reserve,  consisting 
either  of  specie  or  of  notes  issued  by  the  Issue  De- 
partment, which  are  convertible  into  specie.  It  is 
bound  to  make  its  payments  in  gold,  if  so  required, 
like  other  banks  ;  but  it  may  make  payment  in  notes 
with  the  consent  of  the  payee ;  and  if,  for  the  con- 
venience of  its  customers,  it  finds  occasion  to  pay 
out  a  greater  amount  of  notes  than  it  receives  in 
payments  made  to  it,  or  in  deposits,  it  must  procure 
such  notes,  as  any  other  bank  or  any  private  person 

*  The  Issue  Department  is  also  made  an  intermediary  between  the 
public  and  the  Mint,  being  required  to  buy  all  gold  bullion  offered  at 
77s.  gd.  per  standard  ounce.  The  ounce  is  coined  into  77s.  io|d., 
the  difference  being  the  estimated  equivalent  for  a  loss  of  interest, 
caused  by  the  delay  incident  to  the  actual  coining  at  the  Mint. 
Hankey,  On  Banking,  p.  98. 


THE    BANK    OF    ENGLAND.  1 63 

must,  by  taking  an  equivalent  amount  of  gold  to  the 
Issue  Department  and  procuring  notes  therefor. 
Indeed,  so  completely  is  the  Banking  Department 
deprived  of  all  special  facilities  or  privileges  in  deal- 
ing with  the  Issue  Department,  that  it  has  often 
been  said  that,  for  all  practical  purposes,  the  notes 
might  as  well  be  issued  by  a  public  office  at  West- 
minster as  by  a  department  of  the  Bank  itself.* 

The  second  purpose  of  Peel's  Act  is  accomplished 
by  a  series  of  provisions  which  prevent  any  increase 
of  the  note  issues  of  ioint-stock  and  pri-     ^      ,    . 

•'  ^  Regulation 

vate  banks,  beyond  the  average  at  which  of  country 
they  stood  for  the  twelve  weeks  preceding  ^^"^  issues. 
April  27,  1844.  No  bank  not  then  engaged  in  the 
issue  of  notes  is  allowed  to  issue  them,  and  no  bank 
then  existing  can  carry  its  issue  beyond  the  limit 
thus  fixed  for  it.  It  is  provided,  however,  that  if 
any  bank  issuing  notes  at  the  time  when  the  act  was 
passed  shall  close  its  business,  or  become  bankrupt, 
or  discontinue  its  issues  by  agreement  with  the  Bank 
of  England  or  otherwise,  then  the  latter  may  add  to 
the  amount  of  securities  held  in  its  Issue  Depart- 
ment, or  in  other  words  to  the  amount  of  notes  for 
which  it  holds  securities  and  not  coin,  to  the  extent 

^  In  Ricardo's  pamphlet,  A  Plan  for  a  National  Bank,  {Works,  p. 
499),  it  is  proposed  that  notes  should  be  issued  to  the  Bank  by  public 
commissioners,  holding  securities  and  gold  substantially  as  at  present. 
This  pamphlet,  left  in  MS.  at  Ricardo's  death  and  first  published  in 
1824,  is  the  first  distinct  proposition  which  we  now  recollect  for  the 
separation  of  the  issue  and  banking  departments.  Public  discussion 
of  the  subject  seems  to  have  begun  as  early  as  1837.  The  suggestion 
that  the  separation  was  suggested  by  the  New  York  free  banking  sys- 
tem is  certainly  without  founda<-ion.      Old  and  New,  viii.,  590. 


164  CHAPTERS   ON    BANKING, 

of  two  thirds  of  the  amount  of  the  joint-stock  or 
private  bank-notes  thus  withdrawn  from  circulation. 
The  act  then  plainly  looks  forward  to  the  ultimate 
withdrawal  of  all  other  notes  than  those  of  the  Bank 
of  England,  and  to  the  filling  of  the  vacant  place 
by  the  latter,  in  a  certain  measure.'  No  new  issues 
being  permitted,  every  change,  however  brought 
about,  diminishes  the  amount  of  country  bank>notes 
left  in  use.  The  progress  towards  extinction  is 
probably  slower  than  was  expected.  Still,  since 
1844  the  authorized  country  bank  issue  has  been  re- 
duced, by  the  winding  up  of  banks  or  by  the  surren- 
der of  the  right,  from  ^8,648,853  to  ;^4,8 13,400  in 
November,  1890,^  and  the  Bank  of  England  has 
added,  under  the  authority  of  the  act,  to  its  owri 
issues  covered  by  securities  only,  until  the  limit  has 
risen  to  ;^  16,450,000.  But  it  is  plainly  not  the  policy 
of  this  legislation  that  there  should  ever  be  a  large 
circulation  of  bank-notes.  The  smallest  note  issued 
by  the  Bank,  indeed  the  smallest  lawfully  issued  by 
(any  authority  since  1829,  is  for  £^,  a  denomination 
:  too  large  to  make  its  way  far  from  cities  and  large 
towns,  and  of  but  limited  use  even  in  those  places.^ 

*  P'or  some  comments  on  the  intention  of  the  act  of  1844  in  this 
respect,  see  Ecotiomist,  1889,  pp.  505,  697.  Some  intimations  of 
measures  for  ending  the  issue  by  country  banks  were  given  by  Mr. 
Goschen  in  his  budget  speech,  April  15,  1889.    '^qq Hansard' s  Debates^ 

p.  535. 

^  The  actual  average  issue  of  notes  by  the  country  banks,  for  four 
weeks  before  the  date  here  given,  was  only  ;,£' 2,45 5,077. 

^  The  Bank  of  England  issued  no  notes  so  small  as  £t^  until  after 
1759.  See  p.  156.  In  1797,  after  the  suspension  of  specie  payment,  it 
was  authorized  to  issue  notes  as  small  as;[^i,  but  withdrew  them  after 


THE   BANK   OF   ENGLAND.  1 65 

A  large  circulation  of  sovereigns,  affording  a  solid 
basis  of  specie  in  the  hands  of  the  people,  with  a 
small  amount  of  convertible  notes  for  convenient  use 
in  the  larger  cash  transactions,  is  the  ideal  condition 
towards  which  the  uniform  current  of  English  law 
has  been  directed  for  nearly  fifty  years.  In  the 
meantime,  however,  the  current  of  public  opinion 
has  undergone  a  considerable  change  as  to  the  point 
at  which  the  lowest  denomination  of  notes  should  be 
fixed.  The  convenience  of  the  one-pound  note,  long 
in  use  in  Scotland,  has  made  a  strong  impression, 
and  it  now  appears  highly  probable  that  the  issue  of 
such  notes  by  the  Bank  of  England  is  not  far  off. 
The  legislation  for  that  purpose,  when  it  comes,  is 
likely  to  affect  seriously  the  issues  of  the  country 
banks  and  perhaps  to  extinguish  them  altogether, 
and  the  substitution  of  such  notes  for  sovereigns  on 
any  great  scale  must  also  change  materially  the 
practical  conditions  under  which  the  Bank  of  Eng- 
land has  long  issued  its  circulation.' 

To  illustrate  more  clearly  the  operation  of  the  act 
we  v/ill  take  the  account  of  the  Bank  as  it  stood 
September  7,  1844,  being  the  account  on  which  the 

the  return  to  specie.  It  made  a  temporary  issue  of  them  during  the 
crisis  at  the  end  of  1825  and  in  1826,  but  these  also  were  withdrawn 
before  1829,  in  conformity  with  an  act  passed  in  1826.  The  issue  of 
£1  notes  by  country  bankers  was  forbidden  as  early  as  1777,  but  was 
permitted  from  1797  to  1829. 

*  See,  in  the  Economist^  December  7,  1889,  an  article  on  Currency 
Reform.  Also  Journal  of  the  Institute  of  Bankers,  January,  1890, 
for  a  paper,  by  R.  H.  Inglis  Palgrave,  on  the  Note  Circulation.  Mr. 
Palgrave  favors  giving  the  right  of  issue  to  local  banks,  with  proper 
provisions  for  securing  notes  and  insuring  convertibility. 


l66  CHAPTERS   ON   BANKING. 

act  first  took  effect.     The  situation  of  the  Bank  at 
that  date  *  was  as  follows  : 


Liabilities, 

Resources. 

Capital     .    .     . 

£\<\.t  m'ns 

Government  Debt     .     . 

£i\.    m'ns 

Rest   .... 

3.6     " 

* '            Securities 

17.6     - 

Public  Deposits 

3.6     - 

Other  Securities  .     .     . 

7.8     - 

Other 

8.6     " 

Coin  and  Bullion      .     . 

15.2     " 

Seven-day  Bills 

I. 

Notes      .     .     . 

20  2 

51.6  51.6 

As  no  attempt  was  made  by  law  to  protect  by 
preference  any  special  class  of  liabilities,  before  the 
passage  of  Peel's  Act,  it  follows  that  the  resources 
set  down  in  this  statement  were  held  equally  for 
notes  and  deposits  ;  and  it  is  at  least  conceivable 
that  there  might  be  so  strong  a  demand  for.coin  by 
depositors  or  noteholders,  or  both,  as  to  exhaust  the 
reserve,  while  a  large  issue  of  notes  was  still  out- 
standing, in  which  case  payment  of  the  notes  must 
be  suspended.  Thus  in  the  frightful  panic  of  De- 
cember, 1825,  the  coin  and  bullion  of  the  Bank  was 
reduced  to  ^1,027,000  and  suspension  was  imminent, 
while  notes  were  still  outstanding  to  the  amount  of 
^23,359,840.  Such  a  possibility  became  still  more 
serious  after  the  act  of  1833  declared  that  the  notes 
of  the  Bank,  so  long  as  they  continued  to  be  re- 
deemed on  presentation,  should  be  a  legal  tender  in 

^  In  the  Bank  of  England  statements,  Rest  (/.  e.  the  balance  of  the 
account)  means  the  net  profits  on  hand  ;  Other  Deposits  comprise 
individual  deposits  and  deposits  by  banks  ;  Seven-day  Bills  are  post- 
notes,  still  issued  to  a  small  amount ;  Government  Debt  is  the  loan 
made  by  the  Bank  to  the  government,  in  order  to  secure  its  charter  ; 
and  Other  Securities  include  loans  and  advances  to  customers  ufJon 
security. 


THE    BANK   OP^   ENGLAND.  l6j 

England  and  Wales  in  all  payments  except  those  at 
the  Bank  itself.  It  was,  therefore,  an  important 
object,  in  separating  the  departments,  to  gecurit  of 
insure  the  payment  of  the  notes  in  any  issues  under 
event  by  pledging  for  that  purpose  a  suffi-  Pe^is^^*- 
cient  amount  of  securities  and  of  specie.^  How^this 
result  was  accomplished  is  easily  seen  in  the  form  of 
statement  of  the  Bank  account,  adopted  upon  the 
passage  of  the  act,  and  ever  since  adhered  to ; 
Issue  Department. 

Notes     .     .     .    ;f20.2  m'ns     Government  debt     .     .     .     ;^ii.  m'ns 
Other  government  securities        3.      " 
Coin  and  bullion      .     .     .  6.2  ** 


;f20.2         ' 

Capital      .      . 

Bai 

Rest      .     .     . 

3.6 

Public  deposits 

•         3-6 

Other 

8.6 

Seven-day  bills 

I. 

;^20.2    •' 

Banking  Department. 

J     Government  securities    £i'\.(i  m'ns 
Other  securities     .     .     .       7.8     *' 

Notes^ 

Coin  and  bullion        .     .      9.        ** 

31.4     "  31.4     " 

*  Whether  in  case  of  the  insolvency  of  the  Bank  the  securities  and 
specie  in  the  Issue  Department  would  be  held  for  the  preferred  claim 
of  the  notes,  or  would  become  a  part  of  the  general  assets,  to  be 
divided  among  all  the  creditors,  is  not  explicitly  declared  by  the  act 
and  has  been  doubted.  But  it  has  no  doubt  been  the  common  under- 
standing, from  the  first,  that  the  devotion  of  the  resources  of  the  Issue 
Department  to  the  payment  of  its  notes  is  indefeasible.  See  Parlia- 
mentary Documents,  1857-58,  v.,  p.  427. 

'  The  above  shows  the  effect  of  the  separation  of  accounts  taken  by 
itself.  For  convenience  the  Banking  Department  also  transferred  8.2 
millions  of  coin  and  bullion  to  the  Issue  Department  and  received 
notes  therefor,  so  that  in  the  published  accounts  the  banking  reserve 
was  8.2  millions  of  notes  and  .8  million  of  coin,  and  both  the  notes 
and  the  coin  and  bullion  in  the  accounts  of  the  Issue  Department 
were  raised  by  8.2  millions. 


l68  CHAPTERS    ON    BANKING. 

The  thoroughness  of  the  provision  here  made  for 
the  security  of  the  bank-note  is  attested  by  the  fact, 
that  since  the  passage  of  the  act  there  has  never  been 
a  moment  when  the  convertibility  of  the  note  has 
been  open  to  doubt.  The  lowest  point  to  which  the 
notes  in  actual  circulation  outside  of  the  Bank  have 
ever  been  reduced  was  a  little  below  ;£"  1 7,000,000  in 
December,  1848,  and  this  left  in  the  vaults  of  the 
Issue  Department  nearly  ^14,000,000  in  specie,  with 
no  demand  for  it  on  the  part  of  the  public.  Indeed, 
the  Bank  of  England  note,  under  the  act  of  1844, 
has  become  little  more  than  a  warrant  entitling  the 
holder  to  so  much  gold  actually  lying  in  the  Bank 
vaults,  and  thus  the  whole  question  as  to  the  sol- 
vency of  the  paper  currency  has  been  removed  from 
the  field  of  debate,  where  it  had  been  agitated  for  so 
many  years.  The  Issue  Department  gains  nothing 
from  an  increase  of  the  circulation,  and  can  lose 
nothing  by  its  diminution.  The  whole  problem  as 
to  the  bank-note  is  reduced  to  a  mere  inquiry  as  to 
the  preference  of  the  public  for  coin  or  for  a  certifi- 
cate calling  for  coin. 

It  is  evident  also  that  to  the  Banking  Department 
it  is  of  no  consequence,  except  as  regards  conven- 
^        ,.      .  ience,  whether  it  uses  notes  or  gold  in  its 

Separation  of  '  ^  ^ 

departments  business.  If  it  prefers  gold  it  has  Only  to 
IS  complete.   ^^^^  jj^  £qj.  redemption  such  notes  as  it 

holds  or  receives  in  the  course  of  its  business ;  if 
it  prefers  notes  it  has  only  to  send  in  its  gold  for 
exchange.  Its  reserve  is  in  fact  composed  like  that 
of  any  other  bank,  of  gold  or  of  notes  which  are 
good  for  gold,  or  of  both ;  and  this  reserve  it  must 


THE    BANK    OF   ENGLAND.  1 69 

procure,  must  maintain,  and  in  case  of  need  must 
replenish,  as  any  other  bank  must,  by  properly  ad- 
justing its  purchases  of  securities.  Its  profits  would 
obviously  be  the  same  as  now  if  it  discontinued  the 
use  of  notes  altogether,  except  so  far  as  its  business 
might  be  affected  by  the  mere  difference  of  conven- 
ience to  its  customers.  Indeed,  nearly  the  whole 
income  of  the  Bank  of  England,  beyond  the  simple 
return  on  the  investment  of  its  capital,  is  derived 
from  the  use  of  its  credit  in  the  form  of  deposits  in 
the  Banking  Department.  So  far  as  concerns  the 
Issue  Department,  the  only  possible  source  of  in- 
come open  to  it  under  the  act  of  1844  is  limited  to 
the  interest  received  on  the  government  debt  and 
securities  held  by  it,  now  amounting,  as  has  been 
said  to  i^  16,450,000.  This  interest  is  offset,  how- 
ever, by  payments  to  the  government  and  by  other 
charges,  to  such  an  extent  that  the  question  has 
been  raised  seriously,  whether  it  would  not  be  for 
the  advantage  of  the  stockholders  if  the  Bank  were 
relieved  from  all  connection  with  the  issue  of  notes.* 
Complete  as  is  the  separation  between  the  de- 
partments in  theory,  and  generally  even 
in  fact,  it  has  nevertheless  happened  of  the  Umit 
several     times,     under     the     exceptional       o^  uncov- 

,..  -  ^  ..         ..  1  1  ©red  issue. 

conditions  of  a  financial  crisis,  that  the 
embarrassments  of  the  Banking  Department  have 

*  The  annual  profit  from  the  Issue  Department  is  estimated  by  Mr. 
Hankey  at  about  ;^ioo,ooo.  Hankey  On  Banking  (3d  ed.),  p.  63.  In 
the  Economist,  April  17,  1875,  is  a  careful  calculation  by  Mr.  R.  H. 
Inglis  Palgrave,  showing  that  the  government  would  probably  be  a 
loser,  if  it  were  to  substitute  its  own  notes  for  the  issue  now  carried 
on  by  the  Bank  of  England  and  the  country  banks. 


\ 


170  CHAPTERS    ON    BANKING. 

affected  the  issue  of  notes,  in  a  manner  not  originally 
contemplated  by  the  framers  of  the  act.  On  three 
occasions  it  has  been  found  necessary  to  disregard 
that  provision  which  limits  the  securities  held  by  the 
Issue  Department,  and  more  than  once  besides  this 
extreme  measure  has  been  escaped  with  difficulty.* 
In  order  to  understand  the  real  significance  of  these 
occurrences,  it  is  necessary  to  take  into  consideration 
the  circumstances  under  which  the  Bank  of  England 
holds  its  banking  reserve. 

The  most  striking  fact  in  the  situation  of  the 
Bank  of  England  is  that  the  Bank  is  the  centre  of  a 
great  system  of  joint-stock  and  private  banks,  whose 
aggregate  business  and  liabilities  are  many  times 
greater  than  its  own,  and  that  to  this  system  of 
banks  are  confided  the  financial  affairs  of 

Position  of  -  .  1   ..  1  1  1  .  ,  , 

the  Bank  as  the  City  which  may  almost  be  said  to  be 
a  centre  of  ^he  Clearing  House  of  the  world.     It  is  at 

finance.  *^  r       1        1 

all  events  true  that  many  of  the  largest 
trades  in  the  world  make  their  settlement  in  London, 
and  that  especially  the  world^s  supply  of  gold  there 
finds  its  natural  point  of  distribution.  From  this  it 
would  follow,  even  if  England  were  not  herself  a 
great  lender  of  capital,  that  many  of  the  operations 
of  lending  and  paying  undertaken  in  other  countries 
must  be  carried  on  through  London.  The  banks 
through  which  a  cosmopolitan  business  of  this  kind 

^  The  limiting  clause  of  the  act  of  1844  was  set  aside,  or,  as  is 
commonly  said,  "  suspended,"  October  25,  1847,  November  12, 
1857,  and  May  12,  1866,  In  February,  1861,  and  in  May  and  Sep- 
tember, 1864,  the  condition  of  things  was  critical ;  and  in  November, 
1873,  the  suspension  of  the  act  appeared  for  some  days  not  improbable. 


THE   BANK   OF   ENGLAND.  171 

passes  must  at  times  find  themselves  subject  to  great 
and  sudden  demands.  The  nature  of  their  liabiHties 
is  not  constant ;  it  varies  with  every  change  in  the 
condition  of  any  foreign  country  of  importance,  and 
is  at  one  time  steady,  and  at  another  time  uncertain. 
The  reserves,  therefore,  which  are  at  one  time  ade- 
quate for  the  protection  of  these  HabiHties,  are  at 
another  time  too  small.  These  reserves,  however, 
which  belong  to  the  individual  members  of  the  great 
system  of  banks,  are  in  practice  not  held  by  the 
banks  themselves.  The  London  banks,  from  long 
habit,  keep  their  chief  reserves  as  private  persons 
might,  deposited  in  the  Bank  of  England,  retaining 
in  their  own  hands  only  such  small  amounts  as  are 
needed  for  the  demands  of  the  moment,  and  draw- 
ing upon  the  Bank  for  more  important  sums.  Of 
the  "  other  deposits  "  of  the  Bank  of  England  a 
large  part  represents  the  liability  of  the  Bank. to  its 
neighbors  incurred  in  this  manner.* 

The  position  of  the  Bank  of  England,  then,  is  not 
simply  that  of  a  bank  whose  deposits  are  liable  to 
sudden  fluctuations  of  a  peculiar  nature  ;  it  is  also  a 
position  of  great  responsibility.    Whether  by  its  own 

^  Dun,  British  Banking  Statistics ,  p.  124  ;  Bagehot,  Lombard  Street ^ 
p.  307.  In  1877,  when  the  bankers'  deposits  in  the  Bank  of  England 
were  reported  on,  their  maximum  and  minimum  points  were  in  Janu- 
ary and  May  respectively,  the  deposit  accounts  standing  as  follows  : 

January  lo.  May  lo. 

Exchequer  deposits      .     .  £  1.2  millions.         £  4.4  millions. 
Bankers'  "  .     .       13.3         "  8.  " 

Another  **  .     .       18.3         "  15.9        " 

Total     ....       32.8         "  28.3 

For  this  report  see  Parlianuntary  DocufH^nis,^  1878,  xlvi. 


172  CHAPTERS   ON   BANKING. 

action  or  by  the  force  of  circumstances,  the  Bank 
holds  in  its  charge  that  on  which  the  solvency  of  the 
banks  in  general,  the  safety  of  the  commer- 
biiit^y^kT"^'  cial  public,  and  the  credit  of  England  alike 
managing       depend.     Its    managers    have   sometimes 

its  reserve.  r  i  i     •  •  i  i         i 

professed  to  regard  it  as  simply  a  bank 
carried  on  for  the  profit  of  its  own  stockholders  ;  but 
so  long  as  it  holds  the  banking  deposits  it  has  in  its 
hands  the  financial  safety  of  the  whole  community 
and  the  real  leadership  of  the  money-market,  and 
cannot  escape  its  accountability  for  the  manner  in 
which  it  performs  the  duties  of  its  position.  As 
regards  the  issue  of  notes  its  duties  are  too  plain 
and  even  mechanical  to  throw  upon  it  any  serious 
burden  of  this  kind,  but  as  the  depository  of  the 
other  banks  it  is  in  effect  charged  with  the  duty  of 
providing  in  some  measure  for  the  safety  of  all. 

In  this  respect,  as  holding  a  reserve  wherewith  to 
repay  the  borrowed  reserves  of  others,  the  Bank  of 
England,  as  has  been  said,  holds  a  position  remark- 
ably similar  to  that  of  the  banks  of  New  York  City, 
with  the  difference,  however,  that  its  responsibility 
for  prudent  management  is  undivided  and,  therefore, 
inevitable.  Of  course,  the  position  would  be  one  of 
perfect  safety  if  the  Banking  Department  regularly 
held  cash  for  all  its  banking  liabilities,— that  is,  either 
coin  or  notes  redeemable  in  coin  by  the  Issue 
Department.  Its  sources  of  profit  being  the  same, 
however,  as  those  of  other  banks,  the  Banking 
Department  finds  its  interest  as  they  do,  in  the  con- 
version of  idle  cash  into  interest-bearing  securities,  so 
far  as  possible,  and  in  holding,  therefore,  no  larger 


THE    BANK   OF    ENGLAND.  1/3 

cash  reserve  than  is  required  for  safety.  Acting  on 
this  reserve  by  raising  or  lowering  its  rate  of  disj^ 
count,  *  it  is  under  great  temptation  to  defer  as  long 
as  possible  the  diminution  of  its  business  by  the  rais- 
ing of  its  rate,  and  may  thus  be  led  to  keep  itself  weak, 
down  to  the  moment  when  it  needs  to  be  strong. 
And  it  may  happen,  moreover,  that  the  reserve, 
being  suddenly  reduced  by  causes  not  to  be  fore- 
seen, cannot  be  raised  by  the  slow  action  of  the  rate 
of  discount,  in  time  to  escape  all  the  consequences  of 
such  misfortune.  ^  In  every  case  of  remarkable  pres- 
sure which  has  occurred  since  the  separation  of  the 
two  departments,  and  in  most  of  those  which  hap- 
pened before,  the  real  difficulty  presented  will  be 
found  to  have  been  that  of  meeting  liabilities  for 
deposits  with  a  reserve  which  had  become  insuffi- 
cient, either  from  continued  negligence  in  the  past,  or 
from  sudden  demands  on  a  great  scale.  Of  these 
cases  we  will  take  for  examination,  as  an  illustration 
fo  the  present  topic,  the  critical  situation  of  the  Bank 
in  the  great  commercial  panic  of  November,  1857,  ^ 
case  which  may  fairly  be  regarded  as  typical. 

There  is  no  doubt  that  in  England  the  materials 
for  a  crisis  had  been  long  in  preparation.  Rapid 
commercial  expansion  and  a  great  extension  of  credit 
had  brought  the  usual  results  in  the  form  of  unsound 

^  Until  1833  the  usury  laws  had  led  the  Bank  to  adhere  to  a  uniform 
rate  of  discount.  The  present  system  of  a  sliding  scale  was  not 
fairly  adopted  before  1S39. 

^  That  the  Bank,  as  an  important  and  usually  well  informed  leader, 
may  lead  the  market,  but  cannot  control  it  at  pleasure  by  changes  of 
rate,  see  Bsigehot's  Lombard  Street,  p.  114. 


174  CHAPTERS   ON   BANKING. 

business,  of  speculative  prices,  and  of  extreme  sensi- 
tiveness to  any  threatening  influence.     If  no  sudden 
r.^    pressure    had    occurred    all    mis^ht    have 

Course  of  the    ^  ^  *=> 

crisis  of  No-  passcd  off  in  a  mere  subsidence  of  activity 
vember,  1857.  ^^^  j^  general  depression  ;  but  the  sudden 
occurrence  of  a  disastrous  revulsion  in  the  United 
States,  bringing  ruin  to  some  and  carrying  apprehen- 
sion to  all,  developed  a  crisis  which  took  the  whole  j 
community  of  Great  Britain  by  surprise.  *In  August 
the  state  of  things  was  reported  to  be  "  not  unsatis- 
factory," and  no  fear  seems  to  have  been  felt  until 
the  middle  of  September,  when  heavy  failures  in 
New  York,  beginning  with  that  of  the  Ohio  Life 
Insurance  and  Trust  Com.pany  on  the  24th  of 
August,  became  known  in  London.  Still,  although 
gold  began  to  leave  England  for  the  continent,  and 
the  pressure  in  New  York  had  caused  the  cessation 
of  specie  exports  to  England,  the  directors  of  the 
Bank  of  England  seem  not  to  have  thought  the 
difficulty  serious.  It  was  not  until  October  8th, 
when  the  news  of  the  general  suspension  of  payments 
in  Philadelphia  and  Baltimore  proved  that  something 
more  than  an  ordinary  embarrassment  existed,  that 
they  determined  to  raise  their  rate  of  discount,  from 
the  point  at  which  it  had  stood  since  July  i6th,  tosix 
per  cent.  At  this  point  the  condition  of  the  Bank 
was  disquieting.  In  the  course  of  three  weeks  it  had 
materially  increased  its  loans,  but  was  losing  serious- 
ly from  its  reserve,  so  that  the  proportion  of  reserve 
to  liabilities  had  changed  much  for  the  worse,  at  a 
time  when  general  uneasiness  was  beginning  to  make 
the  commercial  public   more  than  ever  anxious  to 


THE    BANK    OF   ENGLAND.  1/5 

borrow,  as  a  prudent  provision  for  the  uncertainties 
of  the  immediate  future.  It  may  fairly  be  said  then, 
we  beheve,  that  a  singular  tardiness  of  action  on  the 
part  of  the  Bank  was  the  immediate  cause  of  much 
that  ensued. 

Without  following  the  steps  by  which  the  crisis 
from  this  point  was  converted  into  panic,  we  will 
take  the  state  of  things  existing  in  the  early  days 
of  November,  when  the  Bank  rate  stood  at  eight 
per  cent.  At  this  juncture,  the  alarm  caused  by 
the  failure  of  several  large  firms  and  of  one  or  two 
provincial  banks  of  some  importance  had  Extraordi- 
intensified  the  demand  for  loans,  both  nary  pressure 
upon  the  Bank  of  England  and  the  other  °"  '^"  ^^"^• 
banks  in  the  city.  The  increasing  disposition  of  the 
latter  to  strengthen  their  own  position,  in  view  of 
the  possible  heavy  demands  to  which  their  great 
liabilities  exposed  them,  not  only  threw  much  of 
the  increased  pressure  for  loans  upon  the  Bank  of 
England,  but  also  led  to  a  marked  increase  in  the 
bankers'  balances — that  is,  in  the  deposits  of  reserve 
by  other  banks.  At  the  same  time  with  this  serious 
change  in  the  amount  and  character  of  the  liabilities, 
the  cash  resources  of  the  Bank  were  falling.  An 
active  export  of  specie  to  the  United  States  had 
taken  a  considerable  amount  from  the  reserve,  the 
rise  of  rates  on  the  continent  of  Europe  had  made  it 
impossible  to  draw  specie  from  that  quarter,  while 
the  apprehension  of  banks  in  the  interior  led  to  a 
serious  absorption  of  cash  by  them.  In  short,  at  a 
time  when  it  was  called  upon  to  extend  its  use  of 
its  own  credit,  the  Bank  found  itself  acted  upon  by 


176  CHAPTERS    ON    BANKING. 

what  has  been  called  an  internal  drain  as  well  as  an 
external  one. 

The  Bank  met  this  dilemma  by  raising  its  rate  of 
discount  on  the  5th  to  nine  per  cent.,  in  the  hope 
of  repelling  the  least  necessitous  borrowers,  and  by 
making  in  the  course  of  the  next  week  an  increase 
of  loans  to  the  amount  of  three  millions  and  a  half. 
Before  the  end  of  the  week,  however,  the  state  of 
affairs  had  become  desperate.  The  general  alarm 
had  deepened  with  the  rapid  succession  of  failures 
in  the  commercial  world  and  the  suspension  of  the 
great  Western  Bank  of  Scotland,^  and  the  moderate 
increase  of  loans  by  the  Bank  of  England  had  done 
nothing  toward  quieting  the  public.  Some  sales 
of  securities  had  been  effected  by  the  Bank,  but 
the  drain  upon  its  reserve  as  well  as  the  increasing 
liability  for  bankers'  deposits  continued.  The  rate 
of  discount  was  raised  on  the  9th  to  ten  per  cent,  but 
without  avail.  The  joint-stock  banks  and  private 
bankers,  had  finally  ceased  discounting,  so  that  from 
Monday,  the  9th,  the  whole  demand  for  loans  was 
thrown  upon  the  Bank  of  England,  whose  reserve  by 
the  nth  had  fallen  to  little  more  than  one  tenth  of 
its  ^'  other  deposits."  On  that  day  came  the  suspen- 
sion of  the  City  of  Glasgow  Bank,'  caused  by  the 
general  alarm  created  by  the  failure  of  the  Western 
Bank  ;  other  banks  called  for  assistance  ;  and  a  great 

•  ^  The  ruin  of  this  bank,  which  in  1857  discounted  to  the  amount 
of  ;,{^20,ooo,ooo  and  had  deposits  of  ;/^6, 500,000,  was  precipitated  by- 
losses  in  America,  although  not  strictly  caused  by  them. 

'^  The  final  and  disastrous .  failure  of  this  bank  in  October,  1878, 
will  long  be  remembered. 


THE   BANK    OF    ENGLAND.  1/7 

discounting  firm  in  the  city  failed  on  the  same  day. 
In    four   days,    beginning    with  the    9th,  the  Bank 
advanced  to  the  pubhc  over  five  milHons  sterHng, 
-but  without   the   effect  of  subduing^   the  ^^ 

<^  The   reserve 

panic  or  stopping  the  drain  of  its  reserve.  is  nearly 
On  the  evening  of  the  12th  it  found  «^p^"^^^- 
itself  with  a  habllitf'  foi  deposits  amounting  to 
thirteen  millions,  and  a  reserve  of  cash  in  its  Bank- 
ing Department  of  only  ;^58i,ooo,'  an  amount  which 
more  than  one  depositor  could  exhaust  by  his  single 
check.  This  feeble  reserve  might  be  expected  to 
disappear  before  the  close  of  the  next  day. 
,  In  all  this  there  had  been  nothing  resembhng  a 
run  upon  the  Issue  Department.  Gold  required  for 
export  or  for  the  interior  was  indeed  drawn  ulti- 
mately from  that  department,  for  it  was  provided  by 
those  who  were  directly  or  indirectly  creditors  of 
the  Banking  Department,  who  drew  therefore  from 
the  banking  reserve  and  thus  caused  notes  held  in 
that  reserve  to  be  presented  to  the  Issue  Department 
for  redemption.  But  the  gold  was  not  obtained 
by  the  presentation  of  notes  hitherto  in  circulation 
or  held  outside  of  the  Bank,  for  from  the  loth  of 
October  to  the  nth  of  November,  the  amount  of 
notes  thus  in  the  hands  of  the  public  is  shown  by  the 
account  to  have  been  almost  without  change.  What 
had  occurred  was  that  the  Banking  Department  had 
been  caught,  at  the  beginning  of  a  severe  pres- 
sure, with  an  insufficient  banking  reserve  and  had 

'  Of  this  only  ;^384,ooo  was  in  London,  the  remainder  being 
held  by  the  branches  of  the  Bank.  See  Parliamentary  Documents^ 
1857-58,  v..  p.  55. 


1/8  CHAPTERS    ON    BANKING. 

been  slow  in  taking  measures  for  escape.  The  posi- 
tion of  the  Bank  was  such  as  that  of  the  London  and 
Westminster  Bank  might  have  been,  had  its  reserve 
of  cash  run  down  while  its  liability  was  large,  except 
that  the  latter  had  no  chain  of  dependent  banks.  It 
was  a  case  of  near  approach  of  failure,  as  simple  in  its 
essentials  as  that  of  any  private  banker  who  is  unable 
to  meet  his  depositors,  or  any  incorporated  bank 
which  is  not  a  bank  of  issue  and  meets  with  similar 
misfortune. 

Under  ordinary  circumstances  a  ready  means  of 
replenishing^  the  reserve  mis^ht  be  found  in 

Impossible  to        ^  ^  ^ 

restore  it  by  the  Sale  of  secudtics  for  cash,  and  such  a. 
usual  means.  ^^.Q^j-g^^  it  has  been  suggested,  should  be 
taken  by  the  Bank  of  England  in  a  case  like  the 
present.  This  resource  can  be  used,  however,  at  the 
height  of  a  crisis,  only  to  a  moderate  extent.  Buyers, 
even  of  the  soundest  securities,  are  at  such  a  time 
few  and  reluctant,  partly  because  of  the  universal 
disposition  to  keep  a  firm  hold  upon  cash  as  the  safest 
provision  for  an  unknown  future,  and  partly  because 
of  the  prospect  that  low  prices  may  be  succeeded 
by  still  lower.  Moreover,  it  is  to  be  remembered  that 
purchases  to  any  considerable  extent  would  have  to 
be  made  by  those  holders  of  capital  who  have  their 
funds  deposited  either  with  the  joint-stock  or  private 
banks,  or  with  the  Bank  of  England  itself ;  and  in 
either  case  the  check  given  in  payment  for  securities 
would  finally  be  a  demand  upon  the  Bank  of  England 
made  by  one  of  its  depositors.  The  sale  of  securities 
would  then  serve  to  extinguish  a  part  of  the  liabilities, 
and  to  that  extent   would   improve  the  condition   of 


THE    BANK    OF    ENGLAND.  1 79 

the  Bank,  but  it  would  bring  in  no  cash  to  meet  the 
steady  drain  upon  the  reserve/ 

Thus  the  Bank,  on  the  12th  of  November,  reached 
the  end  of  its  tether.  Following  the  precedent  of 
the  year  1847,  therefore,  the  management  informed 
the  government  of  the  critical  condition  „  „       .       , 

t>  Suspension  01 

in  which  they  stood,  and  received  in  re-  the  act,  and 
turn  a  virtual  authority  for  the  issue  by  ^  ^  "meaning, 
the  Issue  Department  of  a  further  amount  of  notes 
secured  by  government  securities.'  Thus  empowered, 
the  Banking  Department  transferred  to  the  Issue 
Department  securities  to  the  amount  of  two  millions, 
and  in  exchange  therefor  received  notes  which  were 
placed  in  the  reserve.  The  operation  was  in  effect  a 
sale  of  securities  to  the  Issue  Department,  in  default 
of  other  purchasers,  and  the  receipt  of  payment  in 
notes,  redeemable  on  presentation.  The  effect  on 
the  Issue  Department  was  to  increase  the  absolute 
amount  as  well  as  the  proportion  of  notes  issued  by 
it  upon  securities  instead  of  coin  or  bullion,  but  the 
notes  did  not  cease  to  be  redeemed  in  the  regular 
course  of  business.      Carried  to  a  great  extent  the 

*  On  the  possibility  of  a  sale  of  securities  on  a  large  scale  during  a 
panic,  see  Bagehot's  Lombard  Street^  p.  190. 

^  This  practical  setting  aside  of  an  act  of  Parliament  was  in  the 
form  of  an  assurance  that,  if  the  Bank  found  it  necessary  to  take  the 
step  proposed,  the  ministry  would  ask  Parliament  to  indemnify  the 
Governor  and  Company  for  any  consequences  of  such  illegal  action. 
Besides  the  publication  of  the  entire  correspondence  in  the  Parlia- 
mentary documents,  which  has  been  made  on  every  occasion  of  the 
suspension  of  the  Bank  Act,  the  **  government  letter"  is  given  by 
the  E-conomist  of  November  14,  1857,  and  all  the  correspondence  for 
1S66  in  the  Annual  Register  of  that  year,  p.  305.  See  also  Levi's 
History  cf  British  Commerce  (2nd  edition),  pp.  311,  403,  468. 


l8o  CHAPTERS    ON   BANKING. 

operation  might  plainly  have  weakened  the  notes  by 
endangering  their  convertibility.  Restricted  as  it 
was,  however,  it  cannot  be  said  to  have  had  any  real 
influence  on  the  credit  of  the  note  issue.  It  gave  to 
the  Banking  Department  an  immediate  accession  of 
means  to  the  amount  of  two  millions,  with  the  as- 
surance that  more  could  be  had  if  needed,  the  only 
discernible  limit  to  the  relief  being  the  conceivable 
inability  of  the  Issue  Department  to  continue  the 
redemption  of  an  indefinitely  enlarged  issue  of  notes 
— a  theoretical  limit  too  distant  to  have  any  prac- 
tical bearing.^ 

The  real  assistance  given  to  the  Banking  Depart- 
ment, however,  did  not  consist  so  much  in  the  actual 
Effect  of  the  addition  of  cash  to  its  resources,  as  in  the 
suspension  on  quieting  cffcct  of  the  measure  on  the 
^  ^^  ^^*  public  mind.  In  every  such  state  of 
affairs  it  is  a  factor  of  prime  consequence  that  much 
of  the  public  excitement  is  pure  panic, — an  unreason- 
ling  terror,  which  multiplies  danger  by  destroying 
presence  of  mind.  For  the  easy  movement  of  busi- 
ness under  the  credit  system,  confidence  in  each 
other  and  in  tlie  future  is  necessary.  The  producer  or 
merchant,  using  borrowed  capital,  relies  upon  the 
sale  of  goods  and  upon  fresh  loans  for  the  means  of 
repaying  former  advances,  and  if  the  current  is  in- 
terrupted, if  doubt  on  the  part  of  buyers  prevents 
sales,  or  embarrassment  of  lenders  prevents  or 
diminishes  loans,  the  fears  of  debtors  to  whom  the 
failure    to  make  their  payments  punctually  means 

*  This  whole  subject  was  reported  upon,  with  evidence,  by  a  select 
committee,  in  Parliamentary  Docujnenis ^  1357-58,  vol.  v. 


THE    BANK   OF   ENGLAND.  l8l 

bankruptcy  and  ruin,  become  at  times  ungovernable." 
No  man  is  any  longer  sure  of  any  thing  except  his 
own  indebtedness  and  its  near  maturity  ;  there  is  a 
universal  pressure  to  borrow,  even  beyond  the  real 
needs  of  the  moment,  lest  borrowing  should  presently 
become  impossible  ;  and  there  is  a  universal  tighten- 
ing of  the  grasp  on  all  ready  means  by  such  as  are 
so  fortunate  as  to  have  them.  The  sauve  qui  peut  of 
merchants,  who  are  desperate  as  to  their  means  of 
payment,  is  as  mutually  destructive  and  as  fatal  to 
their  hopes  of  escape,  as  is  the  crush  of  a  panic- 
stricken  audience,  blocking  the  exit  from  a  burning 
building.  To  a  community  thus  dominated  by 
universal  terror,  the  Bank  of  England  was  able  to 
say,  that  its  potential  reserve  was  now  so  enlarged  as 
to  fix  no  limit  to  its  ability  to  extend  its  loans  and 
meet  all  consequent  liabilities.  The  effect  of  this 
assurance  in  allaying  the  panic  was  instantaneous. 
Men  ceased  to  press  for  what  might  not  be  needed 
after  all,  and  the  other  banks  in  the  city,  no  longer 
dreading  demands  from  their  own  depositors,  re- 
sumed their  operations.  Confidence  had  indeed 
suffered  too  severe  a  shock  to  recover  without  that 
process  of  liquidation  which  is  called  a  revulsion  of 
business ;  but  the  liquidation,  instead  of  being 
immediate,  could  now  be  gradual  enough  to  enable 
debtors  to  collect  and  realize  upon  their  resources 
with  some  deliberation. 

It  was  not  then  so  much  the  four  millions  which 
the  Bank  felt  safe  in  adding  to  its  securities  in  a  week 
after  the  suspension  of  the  act  of  1844,  as  the  moral 
relief  given  to  the  public,  which  cQn$titute4  the  real 


1 82  CHAPTERS    ON    BANKING, 

remedy  by  which  the  crisis  was  ended.  As  for  the 
change  in  the  amount  of  the  note  issues  of  the  Bank, 
we  may  fairly  deny  that  in  itself  it  had  any  influence 
whatever,  so  trifling  was  its  amount.  The  notes 
issued  in  excess  of  the  statutory  limit,  and  actually 
in  the  hands  of  the  public,  stood  at  their  highest 
point  on  the  20th  of  November,  when  they  amounted 
to  ;^928,ooo,  and  by  the  end  of  the  month  the  Issue 
Department  had  returned  to  its  normal  condition.* 
Indeed  the  difference  between  the  minimum  and 
maximum  of  the  outstanding  notes  for  the  month 
was  only  ^1,300,000. 

The  conditions  on  which  this  singular  abandon- 
ment of  the  terms  of  the  Bank  charter  has  been 
allowed  are  jealously  guarded.  The  Bank  has  been 
required  to  pay  over  to  the  government  all  profits 
made  by  it  from  any  increase  of  issues  above  the 
statutory  limit,'  and  both  in  1857  and  1866  it  was 
required  to  maintain  its  rate  of  discount  at  ten  per 
cent.,  so  long  as  it  should  use  the  permission  given 
to  it.  As  this  rate  would  drive  away  business  from 
the  Bank  as  soon  as  the  rate  in  the  general  market 
should  fall,  this  condition  insures  as  speedy  a  return 
to  the  legal  limit  of  the  issue  as  is  practicable. 

*  This  opinion,  that  the  relief  given  by  the  suspension  of  the  limit 
fixed  by  the  act  is  a  moral  relief  and  is  not  to  be  found  in  the  actual 
issue  of  notes,  is  confirmed  by  the  fact  that  neither  in  October,  1847, 
nor  in  May,  1866,  was  the  issue  of  notes  upon  securities  increased  at 
all, — the  mere  announcement  that  such  issue  would  be  made,  if 
needed  for  the  reserve,  being  sufficient  to  quell  the  panic. 

'  The  profit  on  the  increase  of  issues  above  the  limit  in  1857  was 
calculated  on  ;i{^2,ooo,ooo,  for  41  days  at  the  rate  of  two  per  cent. 
Parliamentary  Documents ,  1857-58,  xxxiii.,  271,  275^ 


THE    BANK   OF   ENGLAND.  1 83 

Whatever  the  conditions,  however,  the  repeated 
resort  to  this  extra-legal  measure  is  a  remarkable 
departure  from  an  elaborate  scheme  of  legislation 
in  favor  of  a  crude  expedient,  and  does  not  easily 
find  its  parallel,  even  in  English  administration.  And 
the  question  has  been  raised,  with   TOod     ^ 

^  '  o  Question  as 

reason,  as  to  the  real  value  of  a  legal  to  real  value 
limit,  which  everybody  believes  will  be  set  ""^^^s^^^''"^^^' 
aside  when  it  begins  to  press.  Why  not,  it  is  said, 
allow  the  Issue  Department  to  keep  such  amount  of 
securities  as  is  found  advisable,  always  holding  it  to 
the  duty  and  the  test  of  instant  redemption  ?  No 
doubt  if  the  provisions  of  the  act  of  1844  were  to  be 
defended  solely  on  the  grounds  on  which  they  were 
originally  urged  by  Sir  Robert  Peel,  they  would  have 
to  be  condemned.  He  expected  the  act  to  prove  a 
remedy  for  financial  crises  ;  whereas,  not  only  have 
such  crises  recurred  with  the  same  rough  periodicity 
since  the  passage  of  the  act  as  before  it,  but  they  are 
probably  sharper  in  the  London  market  by  reason  of 
the  existence  of  the  very  law  which  was  to  cure  them. 
The  act  has,  however,  served  the  purpose  of  making 
the  legal-tender  paper  of  England  safe  and  converti- 
ble, in  every  contingency  which  is  even  remotely 
possible.  It  has  rendered  an  even  greater  service, 
while  thus  eliminating  the  question  of  convertibility, 
by  setting  in  its  true  light,  as  the  kernel  of  all 
banking  problems,  the  question  as  to  the  proper 
management  of  the  banking  reserve.  No  such  mis- 
takes of  management  could  now  occur  as  marked 
the  whole  course  of  the  history  of  the  Bank  in  the 
first  half  of  this  century.     The  Bank  was  not  quick 


1 84  CHAPTERS    ON    BANKING. 

to  learn  the  real  risks  of  its  position  and  its  responsi- 
bilities ;  but  still  it  has  learned  them,  and  now  guards 
its  reserve  with  vigilance,  by  appropriate  means,  and 
with  general  success.  It  takes  the  alarm  sooner  than 
formerly,  it  sets  its  customary  line  of  supposed  safety 
higher,  and  thus,  in  the  great  crisis  of  1873,  it 
escaped  the  disaster,  which  befell  it  in  1857  i^  ^  con- 
dition of  affairs  not  more  dangerous.  Whether  the 
provisions  of  law  which  have  effected  these  improve- 
ments are  perfect  may  be  doubted.'  Probably  an 
elastic  provision  like  that  contained  in  the  German 
legislation  would  be  easier  in  operation  and  equally 
effectual.  But  some  provision  other  than  that  sug- 
gested by  the  temporary  policy  or  interest  of  the 
Bank  itself  the  law  cannot  fail  to  make,  in  a  system 
of  banking  and  currency  so  highly  concentrated  as 
that  which  England  has  long  maintained. 

From  what  has  been  said,  it  will'  be  seen  that  the 
Bank  of  Ens^land,  althoug^h  a  hie^hly  privi- 

Nature  and  p  .  q      y    r 

organization  Icgcd  establishment,  is  not  a  government 
of  the  Bank,  institution.  It  has  a  partial  monopoly  of 
the  right  of  issuing  notes,  which  in  theory  is  destined 
to  become  complete ;  it  has  the  distinction  of  having 
its  notes  the  only  paper  legal  tender  in  the  United 
Kingdom ;  it  is  the  chief  depositoryof  a  government 
which  maintains  no  public  treasury;  it  is  charged, 
with  the  duty  of  keeping  the  registry  of  the  public 
debt,  and  of  paying  the  interest  thereon  ;  still  it  is  a 
private  corporation  of  the  familiar  type,  managed 
by  its  own  officers,  in  whose  selection  the  govern- 

^  For  Mr.  Lowe's  bill  to  authorize  the  suspension  of  the  limit  of 
1844,  under  fixed  regulations,  see  Eco7wmist  for  1873,  pp.  741,  748. 


THE    BANK   OF   ENGLAND.  1 8$ 

ment  has  no  share,  and  whose  responsibiUty  is  to 
their  own  stockholders  alone.  The  Bank  has  duties 
thrown  upon  it,  partly  by  law  and  partly  by  force  of 
circumstances,  which  make  it  a  highly  important 
member  of  the  body  politic,  and  yet  it  is  in  form  a 
corporation  intended  to  earn  dividends  for  the  owners 
of  its  stock.  For  many  years  after  its  foundation  it 
was  even  forbidden  by  law  to  lend  to  the  government, 
beyond  a  certain  narrow  limit,  without  the  express 
sanction  of  Parliament,^  and  although  it  has  now  for  a 
long  time  been  a  trusted  agent,  and  has  at  times  com- 
promised its  own  safety  by  its  financial  support  of  the 
Exchequer,  it  has  never  failed  in  its  dealings  with  the 
authorities  to  assert  its  own  essential  independence. 
The  organization  of  the  Bank  is  as  anomalous  as  its 
position.  It  is  governed  by  twenty-four  flirectors, 
who,  by  long  established  custom,  must  not  be  bankers, 
and  by  a  governor  and  deputy  governor.  The  di- 
rectors are  elected  annually,  and  by  usage  a  part  of 
the  board  is  changed  every  year;  but  the  changes 
take  place  among  the  younger  members,  so  that  after 
some  years  of  possibly  intermittent  service,  the 
director's  tenure  of  his  position  is  practically  for  life. 
After  many  years  he  usyally  becomes  deputy  gov- 
ernor for  two  years,  in  due  rotation,  and  then 
governor  for  the  like  term,  after  which  and  for  the 
remainder  of  his  official  life  he  is  a  member  of  an 
executive  council  of  directors  known  as  the  committee 
of  treasury.  The  director  enters  upon  ofifice,  there- 
fore, at  an  early  age,  and  reaches  the  positions  of 
most  active  responsibility  only  after  a  long  training 

^  This  prohibition  continued  until  the  year  1793. 


1 86  CHAPTERS    ON    BANKING. 

in  the  Bank  itself.  Such  an  organization  would 
hardly  be  proposed  if  the  case  were  new,  but  it  is,  no 
doubt,  well  fitted,  indeed  too  well  fitted,  to  preserve 
the  traditions  of  policy  and  of  management  which 
secure  the  Bank  from  rapid  change/ 

Under  a  direction  thus  organized,  the  Bank  has 
now  enjoyed  a  long  course  of  prosperity,  seldom 
interrupted  for  any  length  of  time.  Its  imprudent 
loans  to  the  government  early  in  the  wars  of  the 
French  Revolution  caused  its  long  suspension  of 
specie  payment,  from  February,  1797,  to  May,  1821, 
but  the  Bank  reaped  a  rich  harvest  from  its  issue  of 
irredeemable  paper.''  In  the  crisis  of  December, 
1825,  it  was  on  the  point  of  failure,  and  in  1839  ^^ 
was  forced  to  obtain  material  aid  from  the  Bank  of 
France.'  Still,  since  1852,  its  dividends  have  never 
been  at  a  less  rate  than  8  per  cent,  for  any  one  year, 
and  have  averaged  9.95  per  cent»  since  1880.  The 
stock  has  not  been  lower  in  price  than  156  per  cent, 
since  1840,  has  for  thirty-five  years  steadily  kept 
above  200,  and  for  much  of  the  time  since  the  early 
part  of  1883  has  stood  well  above  300. 

^  On  the  government  of  the  Bank,  see  Bagehot,  Lombard  Street^ 
ch.  viii. 

^  For  a  statement  of  the  dividends  and  bonuses  received  by  the 
stockholders  from  1797  to  1816,  together  with  a  searching  inquiry 
into  the  profits  made  by  the  Bank  from  its  relations  with  the  govern- 
ment, see  Ricardo's  pamphlet,  Proposals  for  an  Economical  and 
Secure  Currency,  especially  the  table.   Works,   p.   427. 

^  For  a  brief  statement  of  this  see  Annual  Register^  1839,  p.  289  ; 
and  Tooke,  History  of  Prices,  iii.,  p.  88. 

The  aid  which  the  Bank  secured  from  the  Bank  of  France  in  No- 
vember, 1890,  was  rather  for  the  security  of  the  public  under  the 
pressure  of  a  great  calamity  than  for  the  protection  of  the  Bank  itself. 


CHAPTER   XL 

THE   REICHSBANK   OF  GERMANY. 

In  the  system  upon  which  German  banking  has 
been  reorganized  since  1875,  of  which  the  Reichsbanlc 
is  the  leadinpf  example,  we  have  a  further 

^  ^      ^  A  further 

development  of  the  conception  of  a  note  development 
circulation    resting   upon    a    mixed    basis    ^^°^^^^^^- 

^        ^  ^         cured  system. 

of  securities  and  specie,  but  with  the  im- 
portant change  that  the  law  contents  itself  with 
requiring  the  maintenance  of  this  basis,  without 
specially  pledging  it  for  the  payment  of  the  notes. 
The  German  system  is  then  one  of  securing  the  notes 
by  salutary  regulation,  rather  than  by  the  actual  de- 
votion of  specific  property,  either  in  the  hands  of  the 
government,  as  under  the  national  banking  system  of 
the  United  States,  or  left  in  the  charge  of  the  bank 
itself,  as  in  the  case  of  the  Bank  of  England. 

When  the  present  German  Empire  was  established 
in  1 87 1,  the  reform  of  the  legislation  upon  currency 
and  banking  was  felt  to  be  a  pressing  ne-  q^..  j^^  ^f  ^he 
cessity.  In  their  coinage  some  German  German  sys- 
States  had  ranged  themselves  under  the  *^"^  °  '  ^^' 
thaler  system  and  others  under  the  gulden,  but  in  all 
there  was  a  mass  of  old  coin  in  circulation  of  obso- 
lete denominations.     The  silver  standard  had  been 

187 


1 88  CHAPTERS   ON   BANKING. 

adhered  to  by  all.  Every  member  of  the  North 
German  confederation,  except  the  cities  Hamburg, 
Lubec,  and  Bremen,  and  the  principality  of  Lippe, 
was  issuing  paper  currency  for  the  supply  of  its  own 
wants.  And  finally  thirty-three  banks  of  issue,  with 
capitals  ranging  from  1,200,000  marks  to  35,000,000, 
had  been  established,  each  upon  such  basis  as  the 
state  or  city  establishing  it  found  good,  some  hold- 
ing perpetual  charters,  some  incorporated  for  terms 
of  years,  and  some  holding  only  rights  revocable  at 
pleasure.  These  banks  differed  materially  as  to  the 
limit  of  their  authorized  issues,  and  were  under 
different  obligations  as  to  the  holding  of  reserve. 
To  reduce  this  mass  of  confusion  to  order  and  to  es- 
tablish unity  of  system  in  currency  and  banking,  was 
a  problem  which  constantly  taxed  the  German  mind 
for  the  first  four  or  five  years  of  the  new  Empire. 

The  law  of  December,  1871,  provided  for  unity  of 
coinage  and  prepared  the  way  for  the  subsequent  in- 
troduction of  the  gold  standard  by  the  act  of  July, 
1873.'  Another  law  of  April,  1874,  provided  for  the 
extinction  of  the  paper  currency  issued  by  the  several 

'  The  coinage  laws  of  1871  and  1873  are  to  be  found,  with  copious 
annotations  by  Soetbeer,  in  Bezold's  Geseizgebung  des  Deutschen 
Reichs,  Th.  II.  Band  i.,  this  part  of  the  volume  being  also  issued 
separately  as  Soetbeer's  Deutsche  MUnzverfassung.  See  pp.  35, 
67.     For  a  translation  see  Laughlin,  Bimetallism  in  the  United  States, 

P-  237. 

The  German  law  of  July,  1873,  is  often  spoken  of  as  a  law  "  de- 
monetizing" silver.  In  fact  it  provided  for  coining  gold  money  and 
substituting  this  for  silver,  but  it  did  not  demonetize  the  silver  remain- 
ing in  circulation,  nor  has  this  step  ever  been  taken  by  Germany, 
although  the  government  has  been  empowered  to  take  it  when  the 
mass  of  silver  afloat  shall  have  been  sufficiently  reduced. 


THE   REICHSBANK   OF   GERMANY.  1 89 

German  States,  by  creating  a  currency  of  imperial 
treasury  notes  (reichs-kassenscheine),  convertible  into 
gold  upon  demand  at  the  Treasury,  but  not  a  legal 
tender,  and  authorizing  the  distribution  of  the  notes 
to  the  several  States,  to  be  used  by  them  in  taking 
up  their  local  issues/  Of  the  imperial  paper  120,- 
000,000  marks  were  distributed  to  the  states  in  the 
ratio  of  population,  and  55,000,000  more  were  ad- 
vanced in  amounts  as  required,  and  with  this  aid 
twenty  local  issues,  amounting  in  the  aggregate  to 
rather  more  than  180,000,000  marks,  were  extin- 
guished. And  finally  by  a  law  of  Marefi,  1875,  the 
banks  of  issue  were  brought  under  a  common 
system,  and  the  reform  may  be  said  to  have  been 
completed.' 

The  new  system  required  the  establishment  of  a 
central  bank  to  be  under  the  immediate  EstabUsh- 
supervision  and  direction  of  the  imperial  mentof  the 
government,  and  the  subjection  of  all 
other  banks  pf  issue  to  a  uniform  set  of  regulations 
and  also  to  imperial  supervision.  To  secure  the  first 
of  these  two  objects,  advantage  was  taken  of  the 
peculiar  position  of  the  Bank  of  Prussia.  Originally 
established  as  a  government  bank,  with  a  capital  of 
2,000,000  thalers  supplied  by  the  state,  this  bank  had 
been  enlarged  by  the  admission  of  private  stock- 
holders  until   its   capital    had    risen   to   20,000,000 

^  See  Bezold,  as  above,  p.  181. 

2  The  bank  law  of  1875  is  to  be  found  with  Soetbeer's  annotations 
in  Bezold,  Gesetzgebung^  Th.  II.  Band  i.,  p.  255. 

A  traoslation  is  to  be  found  in  th6  Statistical  Journal  for  1875, 
p.   267. 


IQO  CHAPTERS   ON    BANKING. 

thalers,  but  without  the  surrender  by  the  State  of  its 
power  of  control  or  of  its  disproportionate  share  of 
the  profits.  As  a  part  of  the  new  system  the  Bank 
of  Prussia  now  became  the  Bank  of  the  Empire 
(Reichsbank).  The  Prussian  government  was  paid 
for  its  share  of  the  capital  and  surplus,  and  also 
received  15,000,000  marks  for  its  interest  in  the 
goodwill  of  the  establishment ;  and  the  capital  was 
then  raised  by  subscription  to  120,000,000  marks,  the 
whole  of  which  was  thus  placed  in  private  hands.* 
The  imperial  government  reserved  to  itself  a  direct 
power  of  control  through  the  imperial  chancellor  and 
also  by  the  appointment  of  the  board  of  direction, 
giving  to  the  shareholders  the  election  of  a  commit- 
tee charged  with  certain  duties  of  consultation.  The 
Bank  was  required  to  receive  and  make  payments, 
and  to  conduct  other  financial  operations  for  the  im- 
perial treasury,  without  compensation,  and  also  to 
manage  free  of  cost  the  receipts  and  payments  of  the 
several  states  of  the  Empire.  It  was  thus  made  in 
every  thing  except  its  ownership  a  national  bank  on 
a  large  scale,  although  not  the  largest,  and  had  its 
privileges  secured  to  it  for  fifteen  years. 

Certain  general  regulations  adapted  the  thirty-two 
existing  independent '  banks  of  issue  to  the  new  sys- 

^  For  some  account  of  the  Bank  of  Prussia  and  its  successor,  see 
Bulletin  de  Statistique  et  de  Legislation  Coinparee,  November,  1886, 
p.  556.  For  the  distribution  of  the  40,000  shares  in  the  bank  among 
7,784  shareholders,  see  ibid.,  p.  573. 

^  The  banks  which  are  here  called  '*  independent  "  are  often  desig- 
nated as  **  private  banks,"  to  distinguish  them  from  the  Reichsbank. 
But  as  they  are  incorporated,  the  term  "  independent"  appears  less 
likely  to  be  equivocal  for  American  readers. 


THE    REICHSBANK    OF    GERMANY.  I9I 

tern.  The  exclusive  right  of  issuing  bank-notes  was 
then  given  to  them  and  to  the  Reichsbank,  with  a 
provision  for  transferring  to  the  latter  any  right  of 
issue  which  may  be  surrendered  by  any  of  the 
others/  No  limit  was  fixed  for  the  aggregate  circu- 
lation, but  the  possible  aggregate  of  notes  which 
could  be  issued  without  being  covered  by  cash  in 
hand  was  fixed  at  385,000,000  marks. 
This  total  was  then  apportioned  among  m^iVand 
the    banks,    having    due    regard    to    the      regulation 

.      -  ...  of  all  issues. 

amount  of  the  notes  previously  issued  by 
each  and  to  their  probable  needs  in  the  future  ^ ;  and 
by  this  apportionment  the  limit  for  the  allowed  un- 
covered issue  of  every  bank  taken  by  itself  is  now 
determined.  For  all  notes  issued  by  any  bank  be- 
yond this  limit  of  uncovered  issue,  the  law  requires 
that  cash  shall  be  held,  the  bank  being  allowed  to 
count  as  cash  for  this  purpose  German  coin,  gold 
bullion,  and  foreign  gold,  imperial-treasury  notes, 
and  the  notes  of  other  banks ;  and  if  any  notes  are 
issued  beyond  the  limit,  and  not  thus  covered  by 
cash,  a  tax  must  be  paid  on  them  at  the  rate  of  five 
per  cent,  per  annum.  To  insure  the  prompt  applica- 
tion of  this  rule,  every  bank  is  required  to  report  its 

^  By  the  refusal  of  some  banks  to  accept  the  right  of  issue  under 
this  law,  and  by  the  surrender  of  the  right  by  others,  the  number  of 
independent  banks  of  issue  was  reduced  at  the  close  of  1889  to  thir- 
teen. Staiisiiches  Jahrbuch  fur  das  Deutsche  Reich,  1890,  p.  122, 
where  tolerably  full  statements  as  to  the  German  banks  may  be  found. 
It  is  understood  to  be  the  policy  of  the  imperial  government  to  secure 
the  early  absorption  of  all  the  issues  by  the  Reichsbank. 

*  As  to  this  apportionment  see  Soetbeer*  Bankverfassungy  in  Bezold, 
as  above»  p.  273. 


192  CHAPTERS    ON    BANKING. 

condition  at  four  fixed  dates  in  every  month ;  and 
any  excess  of  notes,  shown  by  any  such  report,  above 
the  allowed  limit  and  not  covered  by  cash,  is  then 
taxed  :^\  of  one  per  cent.  It  is  also  required  that 
the  cash  held,  exclusive  of  the  notes  of  other  banks, 
shall  in  any  case  be  equal  to  at  least  one  third  of  the 
total  circulation,  and  that  the  other  two  thirds  shall 
be  protected  by  discounted  paper,  having  not  more 
than  three  months  to  run.  The  notes. issued  under 
this  system  thus  rest  upon  a  solid  basis  of  specie; 
but  in  addition,  the  presence  of  an  ample  specie  cir- 
culation in  the  country  is  secured  by  a  provision 
prohibiting  the  issue  of  any  notes  of  lower  denomi- 
nation than  one  hundred  marks. 

The  apphcation  of  these  provisions  is  best  seen 
by  reference  to  the  accounts  of  the  Reichsbank. 
The  limit  of  uncovered  issue  allowed  to  the  Reichs- 
bank by  the  original  apportionment  was  250,000,000 
out  of  the  total  385,000,000  marks.  Fifteen  other 
banks,  however,  declined  to  issue  notes  under  the 
conditions  required  by  the  law  and  four  more  have 
since  withdrawn  their  issues  ;  so  that  by  the  transfer 
of  these  abandoned  rights  of  issue,  the  Reichsbank  has 
now  raised  its  uncovered  limit  to  286,585,000  marks. ^ 

*  The  significance  of  the  limit  may  be  understood  easily  by  taking 
any  account  of  the  Reichsbank,  as  for  example  that  of  December  7, 
1889.  As  the  notes  then  outstanding  were  gSi.i  millions,  and  the 
cash  reserve  806.5,  the  notes  exceeded  the  cash  by  174.6  ;  but  as  the 
allowed  limit  of  uncovered  notes  was  286.6,  the  Bank  could  still 
increase  its  issue  by  112  million  marks,  without  being  required  to 
add  to  its  cash.  In  other  words,  the  Bank  had  a  disposable  margin 
of  112  millions,  which  could  be  paid  out  in  specie,  or  in  notes 
calling  for  specie.  This  margin,  it  will  be  seen,  bears  a  close 
analogy  to  the  banking  reserve  of  the  Bank  of  England. 


THE    REICHSBANK   OF   GERMANY.  I93 

It  is  obvious  that  the  important  provision  in  this 
system,  by  which  any  excess  of  notes  above  the 
uncovered  limit,  not  offset  by  cash  in  The  elastic 
hand,  is  taxed,  is  intended  to  produce  the  ^^"^^*- 

general  effect  of  a  prohibition  under  mild  penalty, 
which  admits  some  relaxation  in  case  of  urgent  need. 
The  law  makes  clear  the  general  design  of  the  law- 
making power,  to  secure  the  protection  of  all  issues 
beyond  a  certain  point  by  cash,  and  the  tax  of  five 
per  cent,  is  sufficient  under  ordinary  circumstances 
to  effect  this  object,  by  taking  away  the  induce- 
ment for  carrying  the  issues  beyond  the  line  at 
which  taxation  begins.  But  the  law  has  at  the  same 
time  left  open  the  possibility  of  an  extension  of 
circulation  beyond  the  line  thus  indicated,  whenever 
the  reasons  for  such  extension  are  strong  enough  to 
outweigh  the  tax.  In  the  familiar  case  then  of  a 
commercial  pressure,  when  the  demand  for  loans  is 
imperative  and  the  market  rate  is  high,  it  is  possible 
for  a  bank,  under  this  regulation,  to  meet  the  neces- 
sities of  borrowers  and  thus  to  relieve  the  public 
apprehension,  although  it  is  practically  forbidden  to 
reap  any  important  profit  from  this  action.  In  the 
absence  of  any  such  pressure  it  is  tolerably  certain 
that  the  issues  will  be  kept  within  the  line,  and  that 
the  business  of  issuing  notes  as  gold  accumulates, 
and  of  paying  out  gold  as  notes  come  in  for  redemp- 
tion, will  go  on  naturally  and  automatically. 

In  this  system  are  easily  traceable  the  general  out- 
lines of  the  English  Bank  Charter  Act  of  1844.  The 
suggested  absorption  of  the  entire  right  of  issue  by 
the  Reichsbank,  emphasized  as  it  is  by  a  provision 
13 


194  CHAPTERS   ON   BANKING. 

that  the  government  upon  giving  due  notice  may 

withdraw  the  right  from  any  bank  in  1891,  or  at  the 

end  of  any  decade  thereafter;  the  fixed 

Comparison      ..      .        .  .        .  i        •   i 

with  the        limit  of  notcs  to  be  issued  without  specie ; 
English  sys-  ^nd    the  automatic  arrangement    for  the 
^9.  '  issue   of   notes  against    cash   above   that 

limit ;  all  are  closely  copied  from  the  English  model. 
The  requirement  that  the  cash  shall  amount  in  any 
case  to  one  third  of  the  notes  is  unusual,  although 
the  ratio  thus  insisted  upon  has  long  been  familiar  in 
discussions  of  banking.  The  distinguishing  novelty 
of  the  German  law,  however,  is  the  power  given  to 
increase  the  uncovered  issue  beyond  the  limit,  sub- 
ject to  payment  of  the  tax  of  five  per  cent.,  in  order 
to  secure  a  certain  degree  of  elasticity  at  the  point 
where,  under  the  English  law,  the  rigidity  of  the 
line  drawn  by  Peel's  Act  has  sometimes  presented  a 
frightful  dilemma.  This  elastic  limit  has  several 
times  taken  effect  in  the  case  of  the  smaller  banks, 
and  also  in  the  case  of  the  Reichsbank  in  Decem- 
ber, 1 88 1,  in  September  and  October,  1882,  in  De- 
cember, 1884,  and  January,  1885,  in  December,  1886, 
and  three  times  in  the  latter  part  of  1889,  the  issues 
of  the  Bank  being  on  some  of  these  cases  to  a 
considerable  amount  beyond  the  fixed  limit.  On 
more  than  one  occasion  it  seems  certain  that  the 
operation  of  the  elastic  provision  was  successful  in 
saving  the  German  community  from  what  would 
have  been  a  severe  spasm  of  contraction  under  the 
usual  administration  of  Peel's  Act.' 

The  notes  issued  upon  this  plan  are  not  a  legal 
^  See  the  Economist,  1SS2,  pp.  41,  1331. 


THE    REICHSBANK   OF   GERMANY.  I95 

tender,  nor  are  they  received  at  public  offices  ex- 
cept by  virtue  of  regulations  which  the  government 
reserves  the  right  of  abandoning.  They  Regulation 
are  not  secured  by  any  special  pledge  of  of  the  use 
the  specie  or  discounted  paper  which  the 
law  requires  to  be  held  for  their  protection.  Not 
only  does  this  paper  as  well  as  the  specie  remain  in 
the  possession  of  the  issuing  bank,  but  the  law  gives 
to  the  noteholders  no  special  lien  upon  the  paper  or 
specie,  or  right  of  payment  in  preference  to  other 
creditors.  The  law  in  short  has  simply  provided  by 
suitable  measures  that  the  affairs  of  the  bank,  in- 
cluding its  issue  of  notes  and  the  money  and  securi- 
ties held  by  it,  shall  meet  certain  tests  of  soundness, 
believing  that  both  the  ultimate  solvency  of  the 
bank  and  the  prompt  payment  of  its  circulation  are 
thus  made  secure.  The  credit  of  the  notes  is  main- 
tained by  their  strict  convertibility  and  by  the  law 
which  makes  them  everywhere  current  in  payments 
to  any  bank  of  issue.  Every  bank  is  required  to 
pay  its  own  notes  on  presentation  ;  the  Reichsbank 
also,  under  ordinary  circumstances,  pays  its  notes  at 
its  branches  ;  and  every  independent  bank  is  required 
to  redeem  its  notes  at  an  agency  in  Berlin  or  in 
Frankfort,  as  the  government  may  determine,  in 
addition  to  redeeming  at  its  own  counter.  Every 
bank  of  issue  is  also  required  to  receive  at  par  in 
payment  the  notes  of  every  other  bank,  with  the  pro- 
vision that  all  notes  thus  received,  except  those  of  the 
Reichsbank,  must  be  either  presented  for  redemp- 
tion, or  used  in  payments  made  to  the  issuing  bank 
or  in  the  city  where  it  is  established:     This  provision, 


196  CHAPTERS   ON   BANKING. 

which  imposes  a  safe  restraint  upon  the  smaller 
banks,  is  also  significant  from  its  tendency  to  allow 
the  Reichsbank  alone  to  obtain  any  thing  resembling 
a  national  circulation. 

The  leading  position  of  the  Reichsbank  is  indeed 
well  assured  by  its  240  branches  of  differ- 

Position  and  i  i   •    i 

development  ^^t  gradcs,  which  Carry  on  its  operations 
of  the  ii^  every  part  of  the  Empire,  and  far  out- 

Reichsbank.  111.1  1  11  r  • 

number  all  the  mdependent  banks  of  issue 
and  their  branches.  Of  the  total  capital  and  surplus 
of  the  banks  of  issue  the  Reichsbank  has  not  less 
than  forty-seven  per  cent.  It  issues  five  sixths  of 
the  entire  note  circulation,  and  in  a  country  where 
the  use  of  deposit  accounts  is  so  little  developed  as 
in  Germany,  this  fact  alone  shows  that  it  absorbs  a 
large  part  of  the  banking  business  of  the  country. 
Of  such  use  of  deposit  accounts  as  exists,  however, 
the  Reichsbank  has  also  a  large  share,  in  acquiring 
which  its  extensive  network  of  branches  is  no  doubt 
of  great  service.  It  appears  to  have  suffered  its 
business  of  holding  deposits  payable  after  notice  to 
lapse,  and  to  have  developed  actively  its  accounts 
current,  two  thirds  of  this  part  of  the  business  being 
transacted  by  the  branches.*     Few  of  the  indepen- 

*  The  annual  reports  of  the  Reichsbank,  given  in  the  Annalen  des 
Deuischen  Reichs^  show  its  loans  of  all  kinds,  deposits,  notes,  and 
cash,  to  have  stood  as  follows  for  five  years,  the  amounts  being  given 
in  millions  of  marks  : 

Dec. 


Loans. 

Deposits, 

Notes. 

Cash, 

31.  1885 

.      540.5 

261.2 

858.9 

655.6 

"    1886 

.      661.6 

290.6 

1,009.5 

700.5 

'*    1887 

.      648.1 

331.9 

1,010.5 

794.7 

**    1888 

.      610.5 

301.9 

1,093.4 

883.5 

"    1889 

.     739-9 

347.8 

1,160.5 

764.5 

THE    REICHSBANK   OF    GERMANY.  tp/ 

dent  banks  have  effected  any  such  complete  transfor- 
mation. The  Frankfort  Bank  has  even  diminished 
its  accountsycurrent  heavily  within  a  few  years,  while 
the  Bremen  Bank  holds  nearly  all  of  its  deposits  sub- 
ject to  notice.  After  all,  the  note  circulation  of  the 
German  banks  of  issue,  including  the  Reichsbank,  is 
still  nearly  three  times  as  important  as  their  ac- 
counts current,  although  the  latter  show  a  marked 
growth,. 

The  chief  part  of  the  investments  made  by  the 
German  banks,  aside  from  their  heavy  reserve  of 
specie,  is  in  the  form  of  discounts,  which  amount  on 
the  average  to  between  two  and  three  times  their 
capital  and  surplus.  They  are  authorized  to  lend 
upon  the  deposit  of  securities,  merchandise,  or  bul- 
lion, and  all  of  these  forms  of  loan  appear  to  be  in 
practice.*  The  total  amount,  however,  of  the  loans 
upon  pledge  {Lombardgeschdft)  is  not  so  great  as 
one  fifth  of  the  loans  by  discount,  and  the  proportion 
in  which  this  total  is  divided  between  securities, 
merchandise,  and  bullion  does  not  appear  in  the 
published  accounts." 

Of  the  net  profits  of  every  bank,  the  law  originally 
required  that  from  so  much  as  was  earned  m  excess 
of  a  dividend  of  four  and  a  half  per  cent.,  Division  of 
at  least  one  fifth  should  be  annually  add-  *^®  p^°^*^- 
ed  to  the  surplus,  until  this  should  amount  to  one- 

*  Several  of  the  branches  of  the  Reichsbank  are  depots  for  goods, 
authorized  by  the  Bank  to  lend  upon  the  pledge  of  merchandise. 

^  The  account  of  the  Reichsbank  for  1889  shows  that  of  loans  upon 
pledge  amounting  to  over  186  millions,  the  loans  upon  merchandise 
were  little  over  5  millions. 


198  CHAPTERS    ON    BANKING. 

fourth  of  the  capital.  But  of  the  profits  of  the 
Reichsbank  remaining  after  this  allotment  for  sur- 
plus, it  was  also  provided  that  an  equal  division 
should  be  made  between  the  stockholders  and  the 
government,  with  the  further  cautious  provision,  that 
when  the  annual  dividend  of  the  stockholders 
reached~eight  per  cent,  the  share  of  the  government 
in  any  remainder  of  profit  should  be  three  quarters 
instead  of  one  half.  Under  these  arrangements  the 
government  has  in  some  years  received  from  the 
Bank  a  revenue  of  over  3,000,000  marks,  the  divi- 
dends to  stockholders  since  1875  having  varied  from 
five  to  seven  per  cent,  and  a  fraction.  But  as  the 
law  provided  that  in  1 891  and  every  ten  years  there- 
after the  government  should  have  the  option  of 
discontinuing  the  Reichsbank  or  of  taking  it  at  a 
valuation,  opportunity  was  given  for  making  still 
better  terms  ;  and  accordingly  by  the  act  of  1889  it  is 
required  that  the  ordinary  dividend  before  the  allot- 
ment to  surplus  shall  be  limited  to  three  and  a  half 
per  cent.,  and  that  six  per  cent,  shall  be  the  point  at 
which  shareholders  begin  to  receive  only  one  fourth 
of  any  further  profit.  The  dividends  of  the  inde- 
pendent banks  vary  greatly  but  do  not  now  often 
exceed  six  per  cent.  The  harvest  of  the  German 
banks  was  from  1871  to  1875,  when  the  Bank  of 
Prussia  divided  from  twelve  to  twenty  per  cent,  an- 
nually, and  the  price  of  its  shares  stood  between  170 
and  250  per  cent.  The  price  of  the  shares  of 
the  Reichsbank  now  ranges  in  the  neighborhood 
of  140. 


THE    REICHSBANK    OF    GERMANY. 


199 


NOTE. 

In  the  Annalen  des  Deutschen  Reichs  for  1890,  p.  952,  is  the  bal- 
ance sheet  of  the  Reichsbank  for  December  31,  1889.  Grouping 
some  of  the  details  for  convenience,  the  account  stands  as  follows,  in 
millions  of  marks  : 


Liabilities, 

Resources. 

Capital     .     .     . 

120.0 

Gold  bullion     .     . 

244.7 

Surplus    .     .     , 

25.9 

German  coin     .     . 

489.9 

Notes       ...     I 

,160.5 

Treasury  notes .     . 

16.6 

Accounts  current 

347.8 

Notes  of  banks  . 

13.3 

Profits      .      .      . 

6.0 

Bills  discounted     . 

653.9 

Sundries  .     .     . 

5.7 

Loans  on  security  . 

186.2 

To  correct  error 

Securities     .     .     . 

28.5 

in  original    .     . 

.6 

Real  estate  .    ..     . 

21.3 

Sundries       .     .     . 

12.1 

1,666.5 


1,666.5 


It  will  be  observed  that  according  to  this  account  the  notes  ex- 
ceeded the  cash  on  hand  by  396  millions.  As  the  uncovered  issue 
allowed  by  the  law  is  not  quite  286.6,  it  follows  that  the  Bank  had 
issued  notes  in  excess  of  the  prescribed  limit  by  about  109.6  millions 
for  the  last  week  of  1889.  The  error  noted  above  is  no  doubt  typo- 
graphical and  overstates  some  resource  by  600,000  marks,  but  without 
any  indication  as  to  the  particular  figure  overstated. 


THE   END. 


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